Afford My Home
May God the source of Hope, fill me with all joy and peace by means of my faith in him so that my Hope will continue to grow by the power of the Holy Spirit.
What would you do if there was a possibility that you could buy a home, just a possibility
What would you do if there was a possibility that you could buy a home, just a possibility
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Here's the super-quick rule of thumb: Most people can afford a home that costs up to three times their annual household income. If you have little to no debt and can put 20% down you can probably buy a house worth close to four times your annual income.
Example: If you and your spouse together make $60,000 a year (which was the median household income for first-time homebuyers in 2009), you can probably buy a $180,000 home if you have moderate debt (debt payments of <12% of your income), and a $240,000 home if you have little or no debt and can make a 20% down payment.
If you're single and make $35,000 a year, then you can probably afford only about a $105,000 home. But in most parts of the country, you can't buy homes that cheap. Single people have a tough time buying homes unless they make an above-average salary. Marriage allows a couple to combine their incomes to better afford a home.
The first concept for figuring how much home you can afford is pretty simple. Since you pay for your house with a combination of a down payment and a bank loan, the total of both is the cost of the home:
Down Payment + Biggest Loan You Can Get = How Much Home You Can Afford
The down payment part of the equation is easy to figure -- this is the total of your savings that you're willing to put into your house. (We'll cover down payments in more detail on the next page.) We assume you have money for a down payment because if you don't then you probably can't afford any home, since it's hard to get a loan with 0% down. You usually need a bare minimum of 3% of the purchase price down, more typically 10% or more.
The amount you can get from a lender is a little trickier since it's based on many factors. Here's a calculator that will help you with that.
Here's the takeaway from the
calculator
- Putting 20% or more down opens lots of doors.
When you can make a down payment this big you're almost certain to
qualify for some kind of loan. The bank will be willing to loan
more money than otherwise, and you won't have to pay for private mortgage insurance (PMI), which in turn
helps you afford even more home.
- Debt holds you back. The more debt you already
have the less home you can buy. Decreasing your debt allows you to
afford a more expensive home, everything else being equal. There's more
on this on our pages about the Debt Ratio
and How much loan can you get?
- Buying a duplex or a house with a garage apartment
increases your buying power. When you get a home with a unit you
can rent out, you can count the rent you'll receive as income. This can
allow you to buy a substantially more expensive home than otherwise --
which will be a much better investment. Your net monthly payments could
actually wind up being cheaper, too, once you subtract the rent you'll
receive.
- 30-year loans vs. 15-year loans. The
advantages of a 30-year loan are that the monthly payments are lower,
and with a 30-year mortgage you can qualify for a much larger loan and
buy a much larger (or nicer) house. The downside is that you have to
make payments for an extra 15 years vs. a 15-year loan, and you'll pay
a lot more total interest over the life of the loan.Still, in most
cases you'll go with a 30-year loan. We'll cover the differences
between these later, but if you can't wait then read about 15 vs. 30-year loans.
- We've left out one important thing -- closing
costs. You'll need to either pay the closing costs from your
savings (lowering the amount you have available for a down payment), or
qualify for a loan that's a little larger than the house you want to
buy, and have the closing costs added to the loan (which is called
"rolling the closing costs" into the mortgage).
