How Much House Can You Afford?

December 10, 1999 Borrowers often begin their home search with only the foggiest idea about how much they can afford to pay, which can result in wasted time and frustration. They should know approximately how much they can afford before they start to shop. The amount you can spend on a house depends on your income, the amount of cash you can allocate to the transaction, and the mortgage terms available in the market at the time you are shopping. These include interest rates, points, term, down payment requirements, and the maximum allowable ratio of housing expense to income. In addition, affordability may be affected by your existing indebtedness if this is higher than the indebtedness that lenders are willing to accept, and by closing costs which vary from one part of the country to another. The table below provides some ballpark estimates of how much house you can afford with a 7.5% 2 point mortgage for 30-years. For each of 7 sale prices, the table shows the total cash required to meet down payment requirements and settlement costs, the total monthly housing expense, the minimum income required to cover housing expenses, and the maximum amount of debt service allowable on the minimum income.  To afford a $400,000 house, for example, you need about $59,200 in cash, which assumes a 10% down payment. Your monthly income should be at least $11,284, and (if this is your income) your monthly payments on existing debt should not exceed $905. These numbers were calculated from the Housing Affordability calculator. They are estimates because the assumptions used may not correspond exactly to any individual situation. However, you can use the calculator and change any of the assumptions as you please. For further information on how lenders qualify you for a loan, read Qualifying For a Mortgage. The table assumes that you push your buying power to the limit, which may or may not be what you want to do. In particular, the table assumes that your down payment will be the lowest lenders are willing to accept, which obliges you to purchase mortgage insurance, which increases your borrowing cost. Hence, it may not be prudent to push your borrowing power to the limit. For a discussion of how much you should invest in a house, as opposed to the maximum amount you can afford, read How Much House Should You Buy?   How Much House Can You Afford With a 7%/2 Point/30-Year Mortgage? To Spend This Amount on a House� You Need At Least This Gross Monthly Income� To Cover This Monthly Housing Expense� Other Monthly Debt Payments Should Not Exceed� And You Need at Least This Much Cash� For the Down Payment Lenders Are Likely to Require� And the Closing Costs $400,000 $11,290 $3,160 $903 $59,200 $40,000 $19,200 350,000 10,260 2,871 820 51,800 35,000 16,800 300,000 8,790 2,461 703 44,400 30,000 14,400 250,000 7,330 2,051 586 37,000 25,000 12,000 200,000 6,280 1756 502 19,800 10,000 9,800 150,000 4,710 1317 376 14,850 7,500 7,359 100,000 3,230 903 258 7,940 3,000 4,940 Notes: Minimum monthly income is based on a ratio of monthly housing expense to income of 28%. Closing costs excluding points are assumed to total 3% of the sale price. The maximum monthly debt service payment is assumed to be 8% of minimum monthly income. Monthly housing expense includes principal and interest, mortgage insurance, taxes and hazard insurance. Taxes and hazard insurance are assumed to be 1.825% of sale price. The down payment requirement is assumed to be 10% on prices of $250,000-400,000, 5% on $150,000-200,000, and 3% on $100,000. Mortgage insurance premium rates are .9% with 3% down,.78% with 5% down, and .52% with 10% down.   Copyright Jack Guttentag 2002

Jack Guttentag is Professor of Finance Emeritus at the Wharton School of the University of Pennsylvania. Visit the Mortgage Professor's web site for more answers to commonly asked questions.

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