Q:

How do you know how much of a house can you afford?

A:

Quick Answer

Home buyers can employ several calculations to determine the affordable price range. Lenders recommend that home owners' monthly principle, interest, tax and insurance payments equal less than 28 percent of gross monthly income. Lenders further recommend that a home owner's debt-to-income-ratio not exceed 30 to 40 percent. Debt-to-income-ratio is the percentage of income that goes to all debt, including the mortgage and debts such as student loans and car payments.

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Full Answer

A quick rule-of-thumb to determine an affordable home buying price range is to take annual income and multiply it by 2.5 percent. For example, if a potential home buyer's income is $50,000 per year, his affordable price would be approximately $125,000 or less. This calculation provides a general guide, but to truly determine how much house he can afford, a buyer needs to consider his entire financial picture. If a home buyer has a substantial down payment, he can afford a more expensive house. In the example of the buyer who has a $50,0000 annual income, if he also has a $50,000 down payment, he is able to afford a house in the $175,000 price range. Interest rates also greatly affect affordability. It is important for potential home buyers to determine the interest rate they qualify for before deciding on a price range.

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