Realizing your dream of owning a home requires taking the crucial first step of figuring out how much house you can afford. A house is perhaps the largest purchase you’ll make in your lifetime, not just due to the initial cost but also due to ongoing costs like regular upkeep, furnishings, and insurance. You’ll probably need a mortgage if you can’t afford to buy a home outright — and you’re not alone. A large majority of buyers finance their purchase.
The 28/36 Rule
A common guideline lenders use is the 28/36 rule. This means your monthly housing costs should not exceed 28% of your gross monthly income, and your total debt payments (including housing) should not exceed 36%. These are general guidelines, not hard rules, but they provide a useful framework for thinking about affordability.
Beyond the Mortgage Payment
Many first-time buyers focus only on the monthly mortgage payment and forget about the other costs of homeownership. Property taxes, homeowner’s insurance, potential HOA fees, utilities, and ongoing maintenance and repairs all add to your monthly carrying costs. Budget for 1% to 2% of the home’s purchase price annually for maintenance.
Get Pre-Approved
The most accurate way to know what you can afford is to get pre-approved by a mortgage lender. They will review your income, credit, and debt to tell you exactly how much they are willing to lend you. This number becomes your ceiling — but remember, just because a lender approves you for a certain amount doesn’t mean you have to spend that much. Borrow only what you’re truly comfortable repaying.
Don’t Forget the Down Payment and Closing Costs
You’ll need cash not just for the down payment (which can range from 3% to 20% or more of the purchase price) but also for closing costs, which typically run 2% to 5% of the loan amount. Make sure you have sufficient savings to cover both before you begin your search in earnest.
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