How Much House Can You Afford?

from daveramsey.com on 03 Aug 2009

"How much house can I afford?" Have you ever asked yourself that question and are still wondering the answer? Well, I have the answer for you.

There is no magic dollar amount that you should be looking for regarding the "perfect home". How much house you can afford is as unique as you are; it's based on many factors, including your location, income, savings, personal preferences, and most importantly, the house-buying plan you have in place.

The most ideal way to buy a house is the 100%-down plan. Sounds weird, doesn't it?! But think how much fun that would be! Don't borrow money. Period. If I can't get you to postpone the purchase that long, I strongly suggest you save a down payment of 20% or more, choose a 15-year (or less) fixed-rate mortgage, and limit your monthly payment to 25% or less of your monthly take-home pay.

You want your new home to be a blessing, not a curse. If you buy a house with nothing down and a huge monthly payment, you're inviting Murphy to move into the spare bedroom. You do not want Murphy as a housemate - believe me! Slow down and realistically think through everything before you jump head-first into making this major purchase. If you don't, you'll just be giving Murphy an open invitation to overtake the house.

Here's a quick checklist of important questions to review as you consider how much house you can afford. If you cannot answer "yes" to these questions regarding the house you have your eye on, then it's not a wise move to buy it right now.

Can I make at least a 10% (preferably a 20%) down payment?
Can I keep house payments at or below 25% of my monthly take-home pay? Here's a calculator to help you quickly calculate your payment.
Can I afford to take out a 15-year fixed-rate loan?
Am I working closely with a real estate agent I can trust?

As a free service for my listeners, we can put you in touch with a real estate agent in your neighborhood that I recommend. These agents follow my teachings and will ensure you get a great house that you can afford! Get connected now.

Happy house-hunting!

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Post a Comment

by glendaperkins at February 01 2010 10:33 AM

Does Dave have a Home Bldg 101 info site? Absolute Do's and Dont's with contractors, etc. Step by step - First things first plan. I know his family recently built. We are debt-free!

by Susan at January 29 2010 2:14 PM

We recently sold our home. Looked but could not find what we want for the money. We have decided to build and will be doing some of the work ourselves ie electric, heat/air, painting, flooring. Have already purchased our land without financing. We have about 42000 left even after paying some things off but still owe car and boat payment totaling approx 15000. Should I pay them off and or continue with debt snowball. Dont want to use up what money we have as plan on the building process in later Spring. What should we do?

by Jenifer at January 12 2010 12:57 PM

Ramsey's right on!- If people had been doing this for the last decade, we wouldn't be in this financial meltdown right now. We were "approved" for a $250,000 home, but only spent $130, because we are not dumb. We put more than 20% down to avoid flushing money away on PMI. And our payments (including taxes and insurance) are below 25% of take-home pay...just as Ramsey suggests. We plan on applying lump sums to the principle to save interest. A penny saved is a penny earned. The more interest we save, the more money goes in our pocket when we sell the house, which means more money to buy the next house...hopefully debt free next time. It can be done- especially in this buyer's market. Our home is less than 3 yrs old- we got it for about half of what it cost the original owners just 3 years ago. Take advantage of this market but STAY within Ramsey's budget guidelines. It's wisdom that you won't regret.

by kathleen at January 11 2010 11:31 AM

Is it true that you must be at least 3 payments behind in your mortgage to receive help with a modification. I am still in my home after a divorce and cannot truly afford the payments but want to keep the home. Thank you

by john at January 11 2010 7:46 AM

I live in Northern VA and make about $120K...at 25% rule, my mortage would have to be around $250K..even with 20% down, that is a house around $320,000K with $64K down.

by Invizi at December 14 2009 5:36 PM

The 25% is including the taxes and insurance. Dave just wrote about it in the 9/7/09 version of "Dave Says!" column.

by Rich at December 10 2009 3:48 PM

I think it only refers to P&I since the 2nd bullet point above provides a link to a payment calculator and it says below the calculator. *Our calculation only includes the principal and interest of the payment. Escrow is not included.

by Eli at December 09 2009 8:54 PM

I would also like to know the answer to James's question.

by Ryan at December 09 2009 11:14 AM

Thanks for asking this, James. I'd like to know the answer to this as well.

by James at December 01 2009 12:24 PM

Please excuse the stupid question, but does the mortgage payment you refer to being 25% or less of take home pay include taxes and insurance, or is it only the payment on loan? Thanks for all you do.