How Much Home Can I Afford?
If you're in the position of first-time buyer, it might be challenging to know how much of your income can be dedicated to a mortgage for your first house. The key things you should understand when asking the all-important question of what houses on the market you can afford are the costs that are associated with owning a house and the "30 percent rule" for buying a new home:
The 30 Percent Rule
The 30 percent rule is that you should never spend more than 30 percent of your income on a monthly mortgage for your house pre-tax. It's also known as the 28 percent rule or the 36 percent rule, depending on who you ask. Nonetheless, 28-36% is a good range to go for – if you have that dream house in your eyesight, but it just scratches above the 30% percent of your income, a few extra numbers won't hurt as long as you are good with budgeting and are aware of any additional costs you may incur.
We recommend using the 30 percent rule as a general rule of thumb, as everyone's circumstances are different when it comes to buying their first property – you may want to save up for retirement along with your mortgage, which means you might consider a lower percentage of your income.
Or, you might've been saving for years for a house and already have a healthy chunk of money that can last you a while for a mortgage, meaning you can spend a little extra! As long as you're batting around 30 percent with adjustments for your own means, you will be able to afford the home you are looking for.
One thing you should account for in the "30 percent rule" is any extra costs that come with the home you're looking for:
Sometimes costs outside the house's value can add up to 10% to your bill! Make sure to account for these when you are looking for a property and implement them into your 30% rule. Costs can include, but aren't limited to:
- Monthly Homeowners Insurance
- Homeowners Association Dues
- Property Taxes
Most lenders will require you to include these costs in your monthly mortgage payment unless you put 20% down.
As long as you accommodate the extra costs of home ownership into the 30 percent rule, you will be able to buy the home to start your life without worrying about whether or not it’s in your budget!