Start with this guideline: your target home should cost no more than 2.5 times your gross annual salary. For a $100,000 salary, that’s a $250,000 home.
Now fine-tune that number with a hard look at your finances and current mortgage rates. Use Bankrate’s calculator to estimate your mortgage limit based on income, your target property’s insurance and real estate costs and other monthly debts such as car loans and credit card payments.
The amount you can borrow is limited by the so-called 28/36 rule: Housing costs should total no more than 28% of your gross monthly income, and all debt no more than 36%. The rate you’ll pay will vary based on your down payment and credit score. A down payment of 20% or more gets you the best deal (and avoids the need for mortgage insurance).
Of course, just because a lender says you can afford a certain mortgage doesn’t mean you should. Consider your take-home pay—what actually goes into the bank after taxes, health insurance, and savings for retirement and college. Then add up all your monthly bills, not just debt but also things like utilities, phone, and groceries. You want to feel comfortable that you can cover all your household obligations while still meeting your other financial goals and keeping six months of expenses in an emergency fund.
St. Louis agent Carrie Nenonen says she tells her buyers to start with the monthly payment they can comfortably afford, then approach the lender to determine the maximum mortgage amount based on rates and their credit. “This keeps buyers focused on their particular housing budget,” she says. “Nothing is worse than closing on your dream house only to be ‘house poor.’”