How Much House Can I Afford? 4 Ways to Set a Budget

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You may have your eye on a dream house around the corner, a bungalow by the lake, or a chic city condo, but your budget may have other plans.

One of the biggest questions that homeowners have is “how much house can I afford?”

How Do I Know How Much House Can I Afford?

Buyers want to live comfortably in a place they love, but don’t want to risk going broke. There are a few real estate rules-of-thumb you can follow to help calculate your expenses to make sure your future home isn’t in the poor house.

#1) Consider Home Maintenance Costs

As you consider buying a house, it’s important to realize that you aren’t just paying a monthly mortgage. There are other expenses that you need to take into consideration when budgeting.

If you don’t think about these expenses early on, you will end up living paycheck-to-paycheck and won’t have funds saved for emergency expenses.

A few additional costs and come with home buying and home ownership include:

  • Property taxes
  • Insurance
  • Homeowners association fees
  • Home and lawn maintenance
  • Electricity, utilities, and internet
  • Emergency repairs and problems

Even if you have a set budget that includes all of these elements, there may be some unexpected costs you didn't plan on.

For example, one homeowner told CNBC that he initially budgeted $250 per month for home maintenance costs but then discovered that the costs for lawn maintenance alone were $300 monthly. If you are already financially stressed when buying a home, then you are likely to have even more stress added when unexpected costs crop up.

#2) Budget for Setting Aside 1% of the Home’s Value Each Year

One common rule of thumb when homeowners are trying to figure out how much they can afford is the “one percent rule.” This is based on the idea that you should set aside 1% of the home’s value each year for maintenance.

For example, if your home is worth $300,000, then you need to set aside $3,000 for unplanned emergencies and home improvement.

While this normally is a good rule to follow, you may need to save more based on outside factors. For example, older houses tend to need more maintenance. If you buy a historic house or even a 20-year old house that has all of its original appliances, then you may end up paying more to modernize and improve your home. The same can be said if you invest in a “fixer upper” that you want to improve over time.

If you don’t use that one percent you saved this year, you can roll it over so you have double the amount saved next year.

#3) Follow the 28/36 Rule

If there is one thing to keep in mind to figure out how much house you can afford, it is the 28/36 rule.

This rule states that you should spend no more than 36% of your total income on expenses each month. For example, someone who earns $5,000 per month can afford to spend $1,000 monthly (28%) on a mortgage. This leaves an additional $800 for other expenses.

That being said, this number may increase if you live in a larger city like New York or San Francisco. It can also increase the amount if you want to pay off your mortgage faster.

Some financial experts recommend spending as much as 41% percent of your total income on your mortgage if you don’t have any other debt that you need to pay off. To see this in action, David Bach, "The Automatic Millionaire," created a chart to help homebuyers see what their average payment looks like.

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#4) Calculate Your Costs With Online Tools

Many financial blogs and websites have tools that you can use to calculate exactly how much house you can afford.

For example, NerdWallet has a whole “how much house can I afford” app that lets web users input information based on their current financial situation.

A few of the factors that this tool takes into consideration include:

  • Location
  • Credit score
  • Payment plan
  • Property taxes and homeowners insurance rates
  • Income
  • Monthly debt

You can toggle the slider up and down based on the monthly costs you feel comfortable with. This tool also shows what payment amounts would keep you comfortable financially, which ones would stretch past your 36% debt-to-income goal ratio, and which ones would put serious pressure on your wallet.

Bankrate has a similar tool that allows you to add income or expenses like alimony and car payments that put significant pressure on your wallet alongside a mortgage.

Set a Budget Then Find a Realtor® To Find the Perfect House in Your Price Range

Once you have an idea for your budget, the fun part begins. You can start to look for homes in your area that match your budgetary goals and set criteria. When that time comes, contact Effective Agents.

We use a data-driven system to pair homebuyers with Realtors® who specialize in your needs. You can work with a real estate professional that knows the best houses in the area for your budget.

Get matched with a Realtor® who can help you find your dream home.

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