Figure Our How Much Home You Can Afford

If you listen to any ad for a mortgage company or real estate company or if you just talk to a loan office or real estate agent, you will hear them suggest that if you are renting and have cash for a down payment, then you can afford to buy a home.

There is a dilemma though, what if you don't rent? And if you do rent, how will you know what price range should you start your home search in?

We want to take you step-by-step through a process that can help you come up with a price range for your home search.

Let us put out a disclaimer though, you should always speak with a mortgage lender, to determine EXACTLY what you can afford. This formula will just give you an idea of where to start.

Step One: (Annual salary ÷ 12)
Take your annual salary and divide by 12. For example, 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)
Most brokers and financial planners will recommend that you spend anywhere between 25% and 36% of your monthly income on household expenses. For this example we will use 36%, which would be at the high end of the range. $6,250 x .36 = $2,250.

Step Three: (Calculate your debt)
Add up your currently monthly debt. Make sure you include things like your 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 a monthly payment of $750.

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 x12)
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 (We're 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 brain surgery to you?

Please remember though, this is a quick and easy estimate only! You should work with a mortgage lender so that you know EXACTLY how much you can afford.