Home is more than just an address. It’s where life happens—and it's a big chunk of your budget. Let’s compare some...
6 Minute ReadTopic: home buying
Buying a home can be lots of fun. It’s exciting to see all those years of dreaming come to life in a place you can finally call your own.
But the thrill of the hunt has a funny way of distracting you from a home’s most important feature: affordability. It doesn’t matter if the kitchen is fabulous or the backyard is big. If you can’t pay the mortgage each month or find the cash to fix what’s broken, your home will never be a blessing.
Here’s how to avoid biting off more than you can chew.
Home Affordability Checklist
Before you search for homes or find a real estate agent, it’s important to ensure you’re financially ready and can actually afford the house you want to buy.
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Figuring out how much house you can afford doesn't have to be rocket science. These home affordability questions can help you buy a home in your budget. If you can’t say yes to all six questions, it’s best to put your home purchase on hold.
- Am I debt-free with three to six months of expenses in an emergency fund?
- Can I make at least a 10% (preferably a 20%) down payment?
- Do I have enough cash to cover closing costs and moving expenses?
- Is the house payment 25% or less of my monthly take-home pay?
- Can I afford to take out a 15-year fixed-rate loan?
- Can I afford ongoing maintenance and utilities for this home?
Let’s dig a little deeper to see how three simple steps can help you answer the question you’re really dying to know: “How much house can I afford?”
Step 1: Start With a Solid Foundation
Too many people go broke buying a home because they think it’s the grown-up thing to do, without considering how much house they can actually afford. The house you buy has to match your financial situation. Life events—like getting married or having a baby—aren’t reasons alone to buy a home. The time is right when the money’s right. Nothing can sour your dream of home ownership quicker than a major disaster you don’t have the cash to cover. That’s why we recommend being debt-free with three to six months of expenses in an emergency fund before you buy a home. Just married? Wait at least a year before buying a home. Don’t add the stress of a home purchase to a brand-new marriage, and never buy real estate with anyone you’re not married to.
Step 2: Maximize Your Down Payment
The best way to buy a home is with 100% down. Paying cash for a home may sound weird, but imagine all the fun you could have without a mortgage payment weighing you down!
If you can’t postpone the purchase until you can pay cash, plan to put at least 10% down at the closing table. Of course, 20% is even better because you’ll avoid paying private mortgage insurance (PMI). Why give the bank extra money each month if it doesn’t trim your mortgage down faster?
If you’ve got a 10–20% down payment—plus cash to cover closing costs, moving expenses, and any extra home furnishings you may need—that’s a good sign you’re financially ready to buy a home. Keep in mind that the more cash you put down on the front end, the less money you’ll need to finance—and that adds up to a lower mortgage payment each month.
Step 3: Figure Out How Much You Can Afford to Pay Each Month
You want your home to be a blessing, not a curse, right? Well, if you buy a house with nothing down and a huge monthly payment, you’ll end up broke the first time the hot water heater bursts or the A/C goes out.
So how do you keep your house from breaking the bank each month?
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- For starters, don’t let your lender set your home-buying budget. You may qualify for much more mortgage than you can actually afford to pay, so ignore the bank’s numbers and stick with your own.
- Limit your mortgage payment (including insurance and taxes) to 25% or less of your monthly take-home pay on a 15-year fixed-rate loan. That way you still have money left to save for additional goals, like retirement and family vacations.
Remember, home affordability extends beyond the mortgage payment. Be sure to leave room in your monthly budget to cover other homeownership expenses. These costs may include:
- HOA fees
- Ongoing maintenance and repairs
- Furniture and décor
How Much House Can I Afford?: Calculating the Costs
So how do you figure out just how much house you can afford? If you want to buy a home that won’t bust your budget, you simply need to crunch a few numbers.
- Add up any income you bring in each month. Let’s say you bring home $2,400 a month and your spouse makes $2,600 a month. Your total monthly take-home pay would be $5,000
- Multiply your monthly take-home pay by 25% to get your maximum mortgage payment. If you bring home $5,000 a month, that means your house payment should be no more than $1,250 a month, including taxes and insurance.
Use a mortgage calculator to determine your home-buying budget. Be sure to factor your down payment into the equation and include a buffer in your 25% for taxes and insurance, which are typically included in your monthly mortgage payment. For example, let’s say your maximum monthly payment is $1,250, you have $25,000 for a down payment, and taxes and insurance will cost about $200 a month. That means you could afford a $172,000 house on a 15-year fixed-rate mortgage at 3.5% interest.
- Factor in homeownership costs. Your emergency fund can cover major home disasters. But if you have an HOA or want to save up for a few home upgrades, you’ll need to build room in your monthly budget for those expenses. Just be sure they don’t take away from bigger financial goals, like saving for retirement.
How to Buy a House You Love at a Price You Can Afford
Want to know the secret to home affordability? Work with an experienced real estate agent. They’ll help you get a great deal on the house you love. A good buyer’s agent fights for your best interest every step of the way so you don’t pay a penny more than you have to.
If you’re looking for a local real estate agent who will offer you the same trustworthy advice no matter your budget, give Dave’s real estate Endorsed Local Providers (ELPs) a try. Our ELPs understand the financial path you’re on and won’t push you to overspend on a house just so they can bring home a bigger commission check.
We only endorse the top agents in your area, so you can trust your ELP to negotiate the best deal on the home that’s right for you. Connect with a local real estate agent today!