How Much House Can (No, Should!) You Afford?

Quick and easy 8-step plan to figure out your new house budget

How much should you really spend on your new house? We have eight steps.

In the market to buy a house? Awesome! Let’s get one thing straight. It’s not how much house can you afford. It’s how much house should you afford.

Already got your pre-approval loan letter? Cool! You’ve heard back from the bank, and all of a sudden, you’re a millionaire! The bank has pre-approved you for a surprisingly-high amount. You barely close the email and you’re already Zillow-ing McMansions and considering hiring a butler.

But wait! Don’t get ahead of yourself!

Just because the bank is willing to bet you can pay them back for that loan on your mortgage, are you entirely sure what that even looks like?

First thing’s first. Just like trying on wedding gowns, you only try on ones you can afford. Because, if not, all of sudden you’re sitting in a pool of tears, bridal salon champagne and wrinkled tulle (that you can’t afford). Buying a house is a crazy-emotional concept. As soon as you find that dream house, it can be hard to tear yourself away and fall back to reality. Before you fall in love, your first move is setting a budget.

Consider these standard rules of thumb when determining your realistic new home budget.

Your mortgage should fall between 2-3 times your annual salary (or less!)

If you and your spouse have a combined household income of $100K, you shouldn’t look at houses where you will need a mortgage that exceeds $200-300K. That is, unless you’re a master negotiator! In which case, call on that McMansion and haggle your way down to your budget.

Allocate 25-30 percent of your monthly budget toward your mortgage

Don’t forget you still need to eat! And afford gas, your gym membership, dog food, cell phone, etc. Not every penny can realistically go toward your house. (And, oh, hey! Remember to factor in the cost of real estate taxes and homeowners insurance. Isn’t adulting fun?!)

Your annual debt payments should not exceed 36 percent of your annual income

Remember that four-letter-word, “debt”? Yeah, we’re talking house, car, college loans—all that good stuff. Take account of all the dollars you need to pay annually on all your debt against your annual income and ensure you’re falling within the safe range.

Have enough cold, hard cash for your down payment

Consider paying up front for at least 20 percent of your home sale price. Yes, you can get a mortgage with 10 percent down or less, but then, typically, you will have to pay an additional fee for private mortgage insurance. Consider stretching yourself here. Saving for that 20 percent down payment is a great financial exercise in itself before owning the home. With a 20 percent down payment, you’ll likely get a lower interest rate on the mortgage, thereby lowering your monthly mortgage payment and giving you some extra cash to throw toward your other debt, entertainment fund or retirement (hello retirement savings, we’d never forget about you).

Bonus tip: Having a good credit score is another way to lower the interest rate and monthly payment on your mortgage.

Don’t forget about closing costs

Woohoo! You’ve made it through inspection and now you’re officially closing. Hold up; you’re not out of the woods yet. Zillow reports that, on average, people pay $3,700 in closing fees; or in other words, between 2 and 5 percent of their home price.

Consider homeowner costs

In addition to real estate taxes and insurance, when creating a budget make sure you think about the costs of utilities, lawn services (if mowing isn't in your wheelhouse), renovations, and any other fees that may be necessary to upkeep or upgrade your new home. Keep in mind that these costs should be separate from your emergency fund. Although replacing your old linoleum kitchen counters may seem like a life or death situation, it isn't exactly an emergency… (But, don’t get us wrong; there are certainly times that call for using your emergency fund!)

Don’t bite off more than you can chew

Despite what you may have been told, bigger isn't always better. So before you get too excited about the great listing price on the 4,000 square-foot house of your dreams, think about the additional costs that may come with it. A larger home often means higher utilities. The cost of heating and air conditioning all that extra space will make the check you write to your new friends at the utility company more expensive. And if you plan to pay for housekeeping, lawn care, or any other services those extra square-feet also mean extra bucks.

Set some cash aside for the move

Moving ain’t cheap! Set aside $1-2K for moving expenses like moving trucks, boxes, cleaning supplies, professional movers, etc. Part of that pot o’ money can go toward new furniture to fill your new house, too.

Want to stretch your home budget? Consider what you can sacrifice. Just think: skipping dinners out and cutting down on your non-essential purchases (ahem, we’re looking at you, fantasy football and new wardrobe) can get you closer to that dream house.

Lasting thoughts...

Remember, just because someone tells you that can technically afford that down payment and monthly mortgage, think about how that will feel. What will you have to skip? What luxuries are you accustomed to that you’ll have to forego?

Now that you have your budget in order, now comes the fun part! Whip out that phone and start swiping through homes. Good luck!

Psst. Next, take a look at how to manage that mortgage to learn how to negotiate a deal on your mortgage that will help keep your interest rate and monthly payments low.