Week 19: How much house can I afford?

Buying a home is one of the biggest financial decisions you’ll ever make — and one of the most emotional.

But before you fall in love with a house, it’s smart to know how much you can really afford.

The 28/36 Rule

Lenders often use the 28/36 rule to evaluate affordability:

• 28% of your gross monthly income should go toward housing costs
  (mortgage, property taxes, insurance, HOA)

• 36% of your gross monthly income should be the maximum total debt
  (housing + car loans, student loans, credit cards)

A Quick Formula for checking this

Maximum Home Price = (Annual Income x 2.5 to 4)
This depends on your debt, credit, and down payment.

• Low debt, strong credit, 20% down = closer to 4x income

• Higher debt, small down payment = closer to 2.5x income

Other Tips

• Most lenders will give you a lot of debt, no problem.

  • 25% of net monthly income as a preferable measure of home affordability in my opinion. It’s one from Dave Ramsey I do agree with.

  • Building wealth requires a margin. Consciously spending less on a home is one lever you can pull to do this.

  • The above 25% monthly net example vs. the earlier rules of thumb could create an amazing future beyond a sweet house.

    

  • It allows flexibility to use money for other endeavors like starting businesses, affording income gaps if a spouse wants to change careers or return to school, invest more in higher potential assets, and more.

  • While real estate is a great wealth builder, it’s not always optimal, especially in the case of a primary home.

  • Factor in rising costs like utilities, maintenance, and repairs

  • Keep a cushion for unexpected expenses or job changes

Bottom Line

You can’t control interest rates or housing markets — but you can control how much you borrow.
Start with a realistic budget, not a lender's maximum. Your future self will thank you.

Need a referral or want to discuss your tax planning strategy? I’m happy to help.