A Quick Way to Find Out How Much House You Can Afford

The stock answer given to this question is – if you rent and have cash for a down payment, you can purchase a home. But what if you don’t rent? Then, here’s the simplified version of what a mortgage broker would do with you.

Step One: (Annual salary ÷ 12)

What is your gross monthly income from all sources? If your annual salary is $75,000, divide this by 12 and you’ll see that your monthly income is $6,250.

Step Two: (Monthly salary x percent you want to spend)

Brokers and financial planners will recommend that you spend anywhere between 25% and 36% of your monthly income on household expenses. We’re going to use 36%. $6,250 x .36 = $2,250.

Step Three: (Calculate your debt)

Add up your currently monthly debt. This includes things like a car loan, insurance, school loans, credit cards, and any other personal debt you may have.

All of this added together gives you your total debt. Just a guess, but let’s say that these add up to $750 a month.

Step Four: (Amount you want to spend – total debt)

Now, take that total debt and subtract it from the amount that you were willing to spend per month to get your maximum monthly payment.

$2,250 – $750 = $1,500

Step Five: (Monthly payment x 12)

Multiply that house payment by 12 months, and you have $18,000 to spend each year.

Step Six: (Annual payment ÷ interest rate)

Divide this annual amount by the current interest rate (I’m using 10%, because it’s a nice round number, and a good average). So, $18,000 ÷ .10 leaves you with $180,000 available for a mortgage!

Step 7: (Mortgage + Down payment)

Now, take the amount that you have calculated that you can afford to pay for a mortgage, add the amount of cash that you have on hand to make a down payment, and you get your purchase price!

So, using the current example: The mortgage was $180,000 plus you have $20,000 on hand for a down payment, then you can afford to purchase a home for $200,000.

Now, did that REALLY seem like algebra to you?

Although this is a quick and easy estimate, you should work with a mortgage lender so that you know EXACTLY how much you can afford.

Also, to make it as easy as possible, below we’ve included an Affordability Calculator to help you determine how much you can afford.

Affordability Calculator

Monthly Gross Income $
Monthly Debt Expenses [?] $
Down Payment: $
Interest Rate: %

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