How Much House Can I Afford to Buy?

© 2009, Brandon Cornett. All rights reserved.

Reader Question: “I am buying a house by myself early next year. I have a single income (no spouse), and I make around $85,000 per year. How much house can I afford to buy at that salary?”

I cannot answer this question for you, but I’d be happy to show you how to answer it for yourself. It’s great that you’re doing this kind of research now, before applying for mortgage loans. A lot of first-time home buyers do it in reverse — they start talking to lenders before they have established a budget. But that’s the wrong way to go about it. You are a model home buyer in the sense that you’re doing your research first, and working with mortgage lenders second.

Now, on to the question at hand:

How Much Can You Afford to Buy?

There are two key points I want you to take away from this lesson. They are so important, in fact, that I’m going to repeat them over and over like a broken record. Here are those key points:

1. First, you should start with your current monthly budget and work up from there. Starting at the monthly level is the best way to determine how much house you can afford to buy. I’ll show you how to do that in just a moment.
2. Secondly, you need to realize that it’s possible to get approved for a mortgage loan that’s too big for you. Mortgage lenders can sell the loan into the secondary mortgage market, which removes the risk of making bad loans. It happens all the time, and it’s one of the primary causes of foreclosure in this country.

Once you understand these two points, you’ll be able to make smarter choices about buying a house. So let’s talk more about the first point, your monthly budget.

Your Budget for Buying a House

Add up all of your monthly expenses to see how much money you are spending each month. You can leave your rent out of this process, because you will no longer have to pay that once you buy a house. But you need to include everything else — car payment and insurance, groceries, savings account contributions, credit card payments, plus whatever else you pay on a monthly basis.

Be sure to include the money you spend on leisure activities and entertainment. The idea is to maintain the same quality of life after you buy the home, or as close as possible. If you make too many sacrifices in order to buy the house, you will become “house poor.”

Once you have added up your monthly expenses, you can subtract that number from your monthly net income (i.e., your take-home pay). The amount left over is what you can afford to put toward a mortgage payment. Keep this “magic number” in mind when you are house hunting, and especially when the lender pre-approves you for a loan. Remember key point #2 above — it’s possible to get approved for a loan that’s too big for you.

Let’s say I do this preliminary math and find out I have $1,000 to put toward a mortgage payment each month. But the lender pre-approves me for a loan that would come out to around $1,300 per month. What should I do? I should stick to my $1,000 budget! Remember, I have already determine how much house I can afford to buy … before I started talking to lenders. So if I went with the maximum amount they’ve approved me for, I would be buying too much house. I refer you back to point #2 above. There is a big difference between getting approved for a certain amount and being able to afford that amount. So do your own math first, and don’t exceed your budgetary limits.

Getting Pre-Approved for a Mortgage

Now that you have a monthly spending limit in mind, you should get pre-approved by a mortgage lender. During this process, the lender will review your finances and tell you what they’re willing to lend you. Just remember point #2 mentioned above — you might get approved for a bigger mortgage than you can afford. But that’s okay because you’re a smart buyer, and you know what your own budget is.

Next comes the house hunting process. But note the sequence of events here. First, you established a home buying budget for yourself. Then you got pre-approved for a mortgage loan. And finally, you started looking for houses that fall within your spending limits. This is the best order to do things in. It will keep you from spending too much when you buy a house.

This answers one of the most common questions that first-time buyers have: How much house can I afford to buy? Let’s wrap this up by summarizing the key points made in this article.

• You need to determine your home buying budget before you start talking to mortgage lenders.
• You should subtract your monthly expenses from your net monthly income to see how much you can afford to spend.
• Be sure to account for your leisure and recreational expenses during this process. You don’t want to be so “house poor” that you have to sacrifice things you enjoy.
• There is a difference between getting approved for a certain amount, and actually being able to afford that amount. It’s common for people to get approved for mortgage loans that are too big for them. That’s why you need to establish your budget first.
• You should get pre-approved for a mortgage loan before you start house hunting. That way, you’ll know the maximum amount the lender is willing to give you. Just don’t confuse this pre-approval amount with the budget you’ve already set for yourself. Buy within your budget!

I hope you found this article helpful. To learn how much you can afford to buy, you might also want to read this tutorial on home buying:
The Steps to Buying Your First Home