How much house can you afford? I recently set out to figure how exactly how much house I can afford and found out its a more interest question than you might think.

First piece for how much house you can afford: Income
The most general rule about how much house you can afford is to multiply your annual gross income by two and a half traditionally. I personally think multiply your income by 3 is a little more realistic for most people. Theres factors that raise or lower this but its a great baseline to see what your general range is. For example if you make 60k a year, you can, in general afford a house around 150-180k. If you are a couple and make say 100k combined you could afford 250-300k.

Second piece for how much house you can afford: DTI and HER
To determine how much house the bank thinks you can afford they use guidelines called debt-to-income ratios and housing expense ratios. Thats a fancy way of saying “how much you make vs how much you have to pay out every month on. Its the percentage of your month gross income before taxes that is used to pay your monthly debts. Because there are two different ratios they are written in a slash format. Front ratio vs back ratio. The front ratio is the % monthly gross income that is used on housing costs. The back ratio is the same thing except that it includes all of your debts. Thats great and all but the truth is that it is flexible and doesn’t necessarily the best indicator of how much you really can afford- one way or the other.

Third piece for how much house you can afford: Credit score
This might seem obvious but it makes a huge difference in price range. If you have great credit, you can get the best rates. If you have poor credit you cannot get near as good of rates if you can get a loan at all. Fort example taking the best rate today on my credit unions website for a 30 year fixed loan: 5.75%

Lets say you have perfect credit and get 5.75% rate on a $250,000.00 30 year fixed loan. Your monthly payment aka how much house you can afford would be about $1458.00 per month. Lets say you have a credit score a little lower, say 689. Still good, but not perfect…your rate would be more like 6.3% which would give you a monthly payment of $1547. Thats right, almost $90/month more per month for 30 years!

Some other factors to consider:

Mortgage type – If you can only afford it using an ARM, this is more house than you can afford.

Utilities – How much do you anticipate spending on utilities? Remember, the bigger the house, the more utilities are going to cost.

Maintenance – HOA fees can have a large impact on how much house you can afford

Closing Costs – how much house you can afford is actually a little less than you think simple because there are closing costs that include taxes, title insurance, financing costs, realtor costs etc.

Repairs/Remodeling – Does the house require changes once you DO buy it

Furniture etc – Filling out the house can be VERY expensive

Property Tax – There are taxes levied by city county etc that you will have to pay.

PMI – Private mortgage insurance. If you can’t come up with 20% of the purchase price you will generally have to pay PMI which can be 50-200 bucks a month.

Something for couples to consider:

Should you use both salaries in your “how much house can I afford calculations” and mortgage qualifications?

Only if you’re sure both of you will continue to be employed. If one of you becomes disabled or decides to stay home with the children, you’ve cut your income significantly. When it happens, you’ll be happy if you qualified for a mortgage using only one of your incomes. On the other hand if you are both working good jobs and are planning on building your careers then yes absolutely especially if it gives you the quality of life that you are looking for.

So how much house can you afford Jesse? 
Well I am not going to tell you that   But I will say that the house I like is right on the border and depends on a bunch of other factors.

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