How Much House Can I Afford Rule of Thumb – Steps You Must Know

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Buying a home for the first time is scary!

It means a big step into adulthood, but it can also add a lot of stress.

How much do houses cost? Even if you know the sales prices of homes in your area, how much will that cost per month? Done right, home ownership can set you up for huge financial success.

Done wrong, however, it can lead to being house poor and maybe even bankruptcy or foreclosure.

Fear not though.

It is possible to get answers to all your questions and make smart and informed choices about your home purchase.

In this post, we’re walking together through all the most common questions about buying a home, figuring out all the things that make up your monthly payment and navigating the sometimes complicated world of real estate.

Specifically, though, we’re looking at the exact how much house can I afford rule of thumb formula. That way you can rest easy and make the best choice for your financial situation and start your journey down the road of financial success.

Before you buy a house, it’s vitally important to know the how much house can I afford rule of thumb

Are you on the verge of buying a house? If so you’re probably scared to go through with the deal. After all, it’s the biggest financial decision of your life.

What if you buy too expensive of a house? What would it be like to be house poor? More importantly, what is the how much house can I afford rule of thumb?

Then comes more panic and more questions!

What percentage of your income should go to housing expenses?  How do you figure the total cost of your mortgage?  What do you do if you’ve already bought a house and feel it’s too big a chunk of your monthly budget?

Except for medical care, we never buy anything without first knowing:

  1. What it costs in total
  2. How much we can afford
  3. If it works for our household budget

So with that in mind, its crazy to think that many of us have bought houses without ever knowing the “how much house can I afford rule of thumb”  And yet many of us have, myself included.

If you have not yet bought a house but are considering it, I highly recommend taking a moment to check out my post called First Time Home Buyer Steps. I break down all the best practices, define all the common terms and walk you through the process step by step.  I also utilized 2 amazing realtors when researching that post so you know it’s accurate!

The biggest perils of not knowing the how much house can I afford rule of thumb

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The downsides of not knowing the how much house can I afford rule of thumb can be many and could literally turn your dream into a nightmare.

Worst case scenario you could be facing foreclosure.

Best case scenario you’ll be house-poor.  By that, I mean that so much of your income will be going towards your house payment or rent that you can’t afford much else.  Or (even worse) you begin to live off credit cards to offset you much you’re overspending.

Knowing the “how much house can I afford rule of thumb” is one of the most crucial questions you’ll ask yourselves.

If you’re at least not going further in debt you’re talking about no vacations, bare-bones grocery shopping and rarely eating out.  If you do end up using credit cards to make ends meet you’re not actually saving any money; you’re just delaying the punishment.

Plus when you factor in credit card interest you’re coming out even further behind.


If you struggle to make ends meet each month and need help just getting the basics under control you should check out my post entitled Household Budget Template Tips  It’s just a 3-minute read, but it’s full of useful tips and action items!

The crucial steps to factor the how much house can I afford rule of thumb?

The rule I learned from Dave Ramsey about 8 years ago was to not spend more than 25% of your household income on housing expense.

I was also reminded of the how much house can I afford rule of thumb while listening to a recent podcast by the always insightful Brandon Gaille.

In his podcast, he details the 8 habits of millionaires which includes not spending more than 25% of their annual income on housing expenses.  It’s a great listen!

You can listen to that podcast in its entirety right here, entitled The 8 Habits of Millionaires:

The worst financial mistake of our lives

Anyway, when we bought our house in Dallas in 2006, it was before I knew the importance of knowing the how much house can we afford rule of thumb.

My family and I bought that house for $389,000 and we had a 1st mortgage and a 2nd one.  In those days if you couldn’t qualify for a loan for the whole thing they would do a 2nd mortgage.

That 2nd mortgage would be at a higher interest rate.  It would, however, allow you to avoid PMI (private mortgage insurance).   Those types of loans are something of a rarity these days following the crash in 2008.

We had a 1st and a 2nd mortgage and had not made a sizeable down payment on it.  My wife was mostly at home with our kids and my salary was around $75,000/year.

Guess how much our mortgage payment was?  Including principal, interest, taxes, and insurance, we were paying upwards of $2,700/month!

Our house payment was a whopping 43% of our income!

Is your budget a mess or non-existent?

If you are struggling with bills and can’t seem to get ahead, you may not be using a monthly budget. The budget was one of the real keys to my family getting out of debt, going on dream vacations and getting ahead. And we did while salaries were pretty stagnant!

If you aren’t sure of the basics, check out my post called How to Make a Budget.  I walk you through the exact steps we took to pay off over $80,000 in debt!

But if you’re ready to get started, grab a FREE copy of my budget template right here! It’s the same template my family has used for over 7 years and hundreds of others are using it too!

How much house can we afford rule of thumb free budget spreadsheet banner Middle Class Dad
Digging our way out of the financial hole we were in

Unfortunately for us, we started listening to Dave Ramsey after we bought that house!

Thus we never knew the “how much house can I afford rule of thumb”.  We just blindly assumed if we could qualify for the loan we could afford it.  That was WRONG!

Once we started listening to Dave it was clear something had to change.

We were making things work by using credit cards. But as I’ve already said, that’s just delaying the inevitable.  And for us, the inevitable could have been bankruptcy.

If you are struggling with debt take some cues from my mistakes!

Want to know more about the best percentages to divide up your income by?  Check out my handy infographic!

How much house can we afford rule of thumb how to divide up your paycheck infographic Middle Class Dad

The terrible truth if you’ve already bought too expensive of a house

The sad truth is that many people, just like my family, have already purchased a home they can’t afford.

If you’re already in a mess you have 2 options:

  1. Sell the house or (if you’re renting) break the lease and move to a cheaper house
  2. Ride it out and make cutbacks elsewhere

Deciding which option can be a little tricky.

In the case, I laid out above we had a house payment that was 43% of our income.  Once we finally realized the “how much house can I afford rule of thumb”, the answer was crystal clear.

Thus we had to sell and move down in house. We decided to sell in August of 2008.  Guess what else happened around that time?

Yes, if we’d only sold about a month earlier we could have sold quickly and probably made an extra $100,000.  But no, life was determined to make sure we learned our financial lessons.

Thus it took a year and a half and an over $100,000 price drop to get the thing sold.

But once we did, life was sweet.  We moved into a $900/month duplex. That way we could really make traction on our debt. And we could focus on getting ourselves out from under the mess we had made and to begin to plan for retirement.

Should you move or suffer and stay in an expensive home? 

For me, if your total mortgage payment (including taxes and insurance) or rent is under 33% of your total gross annual income, and you like the house; stay there.

Unless you went with an adjustable rate mortgage your payment will stay close to the same (taxes & insurance will slowly increase) but your income will hopefully be going up each year by a larger percentage.

If, however, your total payment is way over 33% of your income, it’s probably time to sell and move down.

If you’re renting and you have a lot of time left on your lease contact your landlord and see what the options are.  You signed a lease and that means you have an obligation.

A huge rent payment we agreed to is not the landlord’s problem.  But they also will probably sleep better at night knowing someone is in the house who isn’t on the verge of going broke.

Maybe a sub-lease or maybe the rental market is hot and you sacrifice some or all of your deposit to walk away.

If you own and are upside down on your mortgage that does add a layer of complexity.

But if your payment is way high like mine was and you’re only underwater by a little bit (under $20k), it might make sense to take our a personal loan from a credit union for the difference and sell anyway.

If the housing market in your area is terrible and you’re on the verge of defaulting on your mortgage you might also ask your lender about a debt forgiveness program.

Or maybe a short sale (where you sell for less than you owe and the bank accepts that as payment in full).  Banks were probably a whole lot more willing to consider those things in 2010 than now, but it never hurts to ask.

How much house can you afford on 60000 a year?

Of course, qualifying for a mortgage is different than what works with your budget.

Mortgage qualification is based on:

  • The total household income
  • Your credit score
  • All outstanding debt

But purely in terms of how much home I could afford using the rule of thumb, I would personally not buy a house that cost more than $150,000.

Ultimately at that income level, you want your total monthly payment (including taxes and insurance) to be around $1,250/month max.

How many times your annual income should your house be?

As I get into more below, you want your total monthly house payment to be about 25% of your monthly net income.

If your paychecks total $5,000/month that amounts to a net income of $60,000/year.

Knowing as we factored above that a house that costs about $150,000 is about right, you want to look for a home that costs about 2.5 times your annual salary.

So what are my . . .

5 Steps You Must Know About the How Much House Can I Afford Rule of Thumb?

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1. ADD YOUR TOTAL HOUSEHOLD GROSS INCOME

Take your total household income.
If you’re looking at an annual amount, divide by 12 to arrive at a monthly figure. If you or your spouse get paid irregularly (pay dates or amounts), you’ll want to do the following:

  • Look at the previous year’s gross annual income on your tax return or W2
  • Decide if the coming year will be comparable, lower or better
  • Using that info, arrive at an estimated total and divide by 12 for a monthly amount
  • If you get quarterly bonuses or other large, irregular fluctuations, don’t include those amounts; I’d rather you occasionally get extra money to put towards debt, vacations or retirement than be counting on that money and not have it be there each month

Let me give you an example.

When I was a GM for the largest natural foods grocery out there, I made a nice 6 figure salary.  But a good chunk of that was in the form of a quarterly bonus based on the profitability of my store.

If sales tank, guess what else tanked?  My salary!  My actual regular paychecks added up to about $70k/year.

So using me as an example, I would take $70,000 and divide by 12 for a monthly gross of $5,833.  The bonuses which I may or may not get 4 times a year should not fall into that.  That’s gravy but shouldn’t be relied upon for essentials.

2. MULTIPLY THAT BY 25%

The monthly gross gets multiplied by .25, representing exactly 25% of your monthly gross household income.  Going back to my example, 25% of $5,833 is $1,458.

3. THAT IS THE TOTAL AMOUNT YOU SHOULD SPEND ON HOUSING

Now the figure you have is what your total monthly housing costs should be.

Again returning to my example, $1,458 is the max I should have spent on housing costs if there were no other steady sources of income.  Thus that house payment we had I detailed above was more than $1,200 too high!

4. HOW DO YOU CALCULATE YOUR TOTAL HOUSING COSTS?

If you own your home (and have not paid it off yet) your total housing costs include:

  • Your principal
  • The interest payment on that principal
  • Your annual property tax amount
  • The insurance on your home
  • HOA costs (if any)
  • PMI costs (if any – this stands for private mortgage insurance)

If you own your home and don’t know those amounts the easiest way to get them will be to login to your mortgage company’s website as the info will be right there.

Paying your taxes and insurance through your mortgage company?

This is commonly referred to as escrowing.

Don’t know what that means?  When you buy a house you have 2 options pertaining to insurance and taxes.  You can include them with your mortgage payment. This is called escrowing those costs.  Or you can keep them separate and pay them on your own.

Unless you are a highly organized and disciplined person, escrowing them into your mortgage payment makes more sense.  Doing that, the mortgage company actually pays those entities at the end of the year, estimating the total payments.  Then they simply divide those total annual costs by 12 and add that amount to your mortgage payment each month.

If you escrow those costs then your mortgage payment IS your total monthly housing cost (not counting HOA if you have one).  If you do not, you need to know how much your annual property tax and insurance bills are.

Calculating insurance and taxes for a monthly payment

Then add those together and divide by 12.

Add that amount to your monthly mortgage payment.  If you are paying PMI, it will already be in your monthly payment.

If you have an HOA bill you pay each month, include that with the remaining payments.

Now you have your total monthly housing expense.  If you rent, your rent is obviously the main component. But if you have renter’s insurance, include that monthly amount as well.

If your total monthly housing cost is way over your 25% calculation, then the “how much house can I afford rule of thumb” tells us you spent too much.

Now you need to walk through the steps above to determine if you should sell or stay.

5. HAVEN’T BOUGHT A HOUSE YET?  CALCULATE THE MAX SALES PRICE YOU SHOULD LOOK FOR

If you are in the market for a new home, that’s great!  Following the above steps, you know how much you should be spending per month on housing. But how do we translate that to the “how much house can I afford rule of thumb”?

Is that impossibly complicated math?  No!  Fear not.

First, we need to know how much of a down payment can you put down.  Avoid 0 down programs and plan to do somewhere between 5% and 20%.

Obviously the more you put down, the smaller your payment.  Also know that unless you put down 20%, you will be adding PMI to your monthly payment (probably a max of about $100).  This protects the lender in case you default.

Let’s assume for these calculations you plan to put down 5%.

Let’s also assume your gross annual income is $70k like mine was in the above example.  Thus we know your total monthly housing costs should be around $1,458.  For my purposes, I’m assuming an interest rate of 4%.

In this scenario, you are looking for a house with a sales price of about $160,000 on a 30-year loan. 

Here are the calculation formulas for you to factor your own situation.

  • Total monthly payment ($1,458) * 78.21% = principal & interest
  • Total monthly payment * 11.59% = property tax (can definitely vary quite a bit from city & state)
  • Total monthly payment * 5.8% = home owner’s insurance
  • Total monthly payment * 4.40% = PMI

Of course, there are a lot of variables and these will not be down to the penny.  They should, however, be in the ballpark and steer you pretty close to where you need to be.  Also, know a 15-year loan is much better financially than a 30 and can mean the difference on a $160,000 house of over $100,000 in interest over the life of the loan, but only increases your payment by about $400/month.

If you’re already in a 30-year loan and aren’t sure if you should refinance down to a 15 year, you’ll definitely want to check out my post How To Pay a 30 Year Mortgage Off Faster  It’s a simple 5-minute read that walks you step by step through the process of paying your 30-year mortgage like a 15.  And saving you thousands of refi costs in the process!

Did I cover all your “how much house can I afford rule of thumb” questions?

In this post, we looked at how to use the how much house can I afford rule of thumb to make sure you don’t end up house poor.

But we also broke down the crucial formulas used to calculate everything. Lastly, we looked at what to do if you’re already in a home that’s too costly for your income bracket.

Ultimately done right, home ownership is a dream. Done wrong and that dream can quickly turn into a nightmare.

Feel free to comment here or email me with any questions as I am here to help!

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How much house can I afford rule of thumb Jeff Campbell bio Middle Class Dad

While I have years of successful financial & budgeting experience and run several million dollar businesses and handled the accounting, P&L and been responsible for the financial assets of them, I am not an accountant or CPA. Like all my posts, my posts are my opinons based on my own experience, observations, research and mistakes. While I believe all my personal finance posts to be thorough, accurate and well-researched, if you need financial advice, you should seek out a qualified professional in your area.
Photo credits (that aren’t mine or which require attribution):
Home Equity – Home on top of stack of Money by By: American Advisors Group is licensed under CC BY 2.0



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