When it comes to homebuying, everyone knows the critical rule: Don’t purchase more house than you can afford. But what constitutes “affordable” will differ from one buyer to the next. As of September 2019, the average price for a new home was nearly $363,000, meaning some folks pay a lot more than that, and others a lot less. Wherever you fall on the spectrum, it’s likely that a home will amount to one of the largest single purchases you will ever make.
- Setting a homebuying budget involves more than seeing if you can swing a mortgage payment.
- To determine if a home is affordable, calculate your entire debt-to-income ratio: all your monthly expenses divided by your gross income.
- Homeownership involves a variety of ongoing costs, including homeowners’ insurance, property taxes, and repair/upkeep expenses.
- Affording a home means being able to make at least a 20% down payment on it; otherwise, you’ll incur costly private mortgage insurance.
The 25% Rule Can Get You Started
One of the easiest ways to calculate your homebuying budget is the 25% rule, which dictates that your mortgage shouldn’t be more than 25% of your gross income each month. The Federal Housing Authority is a bit more generous, allowing consumers to spend up to 29% of their gross income on a mortgage. But don’t forget that, if you have other debts, you must consider them, in addition to the mortgage payment, to determine how much you can truly afford.
Mortgage lenders look at this overall figure—a prospective borrower’s debt-to-income ratio—when determining if they will lend money. Let’s say your monthly mortgage payment is $1,000 a month and your other expenses are $1,000, so overall, your monthly obligations come to $2,000. Now let’s say you have a gross monthly income of $6,000. That puts your debt-to-income ratio at