How much home can I afford?

Ryan asks Dave how to determine how much house you can afford based on your yearly income. Dave gives the answer and an explanation here.

QUESTION: Ryan follows Dave on Twitter. He asks how to determine how much house you can afford based on your annual income. Dave explains his formula and the reasons behind it.

ANSWER: We tell folks never to take out a loan where the payment is more than one fourth of your take home pay on a 15-year, fixed rate mortgage. That’s the most you should ever buy. That’s a pretty conservative number, because you actually, technically qualify for almost twice that.

But a fourth of your take home pay on a 15-year, fixed rate mortgage is what we recommend, Ryan. The idea is to get the house paid off as soon as possible, because being debt-free is your shortest path to wealth. When you don’t have any payments it’s easy to build wealth and increase your generosity.