With a home purchase being one of the largest financial investments you’ll make in your life, it’s imperative that you correctly determine how much house you can afford; what we are referring to here is how much you can afford to pay towards your monthly mortgage with your current income and debt. There are instances, unfortunately, where some homeowners become “house poor” when they purchase their home because they are not able to afford anything more (such as savings) than their home and current bills.

In this article, we’ll explore how to accurately determine how much house you can afford before you take the dive into your first mortgage.

36% Rule

It’s widely believed by the majority of financial experts that when someone finances a house, they should spend no more than 36% of their income before taxes on the mortgage. The amount this ends up being able to afford you varies greatly depending on your location and the amount of your income. If you find that 36% of your income either isn’t enough to afford a home in your area, or not enough to afford the type of home you need, you may need to reconsider the location of your search, increase your income, or consider saving more for a downpayment towards the purchase of the house in order to reduce your mortgage.

Your Budget

Any time you plan to make any type of significantly large purchase, especially one as large as a house, it is vital that you take a look at your budget and current bills and ensure the mortgage you’re considering will fit in with your current financial obligations. Write out how much you are currently paying in the following areas:

• Current mortgage or rent
• Car expenses and payments
• Debt repayments
• Health insurance/Life Insurance
• Grocery Bills
• Any other recurring monthly expenses

Once you’ve done this, are you finding where there is any more room to fit in the mortgage you’re considering? If not, you may need to revise how much house you are purchasing or look at ways to cut budget costs or increase your income.

Use a Mortgage Calculator

A mortgage calculator is a helpful tool that can help you calculate things like:

• Monthly income from all sources
• Your down payment amount
• Real estate tax estimates
• Homeowner’s insurance
• Mortgage interest rates
• Any other monthly expenses

You can then get an idea of how much you can expect to spend on your mortgage each month. This is important considering the 36% rule and when you’re calculating how much you can afford within your budget. Mortgage calculators can be found with a quick Google search and are readily available on many financial websites for you to use.

Other Homeownership Costs

Aside from the mortgage and insurance and taxes, there are other financial obligations that you need to consider when planning out how much home you can afford to finance. With a new home purchase, you can expect to run into new charges and costs that you aren’t used to previously paying. Some things for you to consider when calculating your home’s cost are:

• What are the going rates for utilities in the area you are planning on purchasing? Will your home be more expensive due to size, age, or other factors? High utility bills can add hundreds of dollars in expenses to your new monthly budget.
• Is your home in a neighborhood with a Homeowners Association (HOA)? If so, there is a good chance you’ll need to account for monthly HOA maintenance fees which can total in the hundreds at times.
• Are you prepared for maintenance and repairs on the home? Have you started an emergency fund for when things go wrong in the house? If not, this is something you’ll want to consider planning for in your budget.
• Do you have enough furniture to fill the home? If not, you may need to account for a new furniture budget.