Welcome to the BeSmartee blog. Enjoy a wide selection of articles related to mortgages, the industry, and real estate.

How Much House Can I Afford?

By Tim Nguyen · Nov 14, 2014 · Real Estate

How Much House Can I Afford?

Image courtesy of Flickr, 401(K) 2012

Learn how to calculate how much house you can afford and determine your monthly payment and mortgage loan amount.

If you're asking yourself this question before you buy a new house you're already ahead of the curve. By figuring out how much of a house you can afford you ensure that you don't over extend your ability to make the payments. Additionally, you'll save time by only looking at homes within your affordable range.

If you make $6,000 per month you can afford a $302,498 mortgage.

Based on your own unique scenario, what you can afford may be less or more. The rest of this post will show you how. Or, you can use this handy Mortgage Affordability Calculator.

How Much House You Can Afford Depends on How Much Mortgage You Can Afford

While you may have a gut feeling about how much you can afford each month, mortgage lenders have a specific method to calculate how much they're willing to lend you. So, to answer this question you'll have to look at it from a lenders perspective.

First, you'll need to determine how much of a mortgage you can afford each month, then knowing that number, you can determine the loan amount you'll be able to afford and voila, you'll know how much of house you can afford.

Here's how to do this:

1) Calculate Your Maximum Debt Payment

The first thing to do is determine how much of a maximum debt payment you can afford based on what your income is. To do this, you'll need to know your gross income and then take into consideration the lender's DTI requirements.

Your gross income is how much you make before paying taxes and other deductions such as retirement contributions and health insurance.

DTI is your debt-to-income ratio. Every lender has different DTI requirements, but generally speaking, the most common DTI is 36%.

Your monthly gross income: $6,000
Lender's maximum DTI limit: 36%
Multiply gross income by DTI: $6,000
x      .36
Your maximum debt payment: $2,160

Based on the calculation above you can afford a maximum of $2,160 towards your debt payments each month. It's important to note that your debt payment includes not only your principal, interest, property taxes and insurance (PITI), but also your revolving debt payments as well.

In other words, what you pay towards PITI and other debt payments must not exceed $2,160.

2) Calculate Your PITI

PITI represents your total housing cost that you make each month. PITI tells your lender how much of your monthly income is used to keep the house.

To calculate your PITI you need to back out other debt payments you're required to make each month from your maximum debt payment that we calculated earlier.

Other debt payments include your car payment, credit card payment, student loan payment, alimony/child support and other similar debt commitments. Do not include monthly payments such as cell phone bills, childcare and auto insurance.

Here's how to calculate your PITI:

Your maximum debt payment: $2,160
Determine total monthly debt payments:
     a) Car payment
     b) Personal loan payment
     c) Student loan payment

+   50
Subtract debt payments from maximum debt payment: $2,160
-    350
Your maximum PITI payment: $1,810

3) Calculate Your House Affordability Based On Your PITI

Now that you know your PITI payment you can calculate how much of a house you can afford by determining how much of a mortgage loan amount you can afford.

Unfortunately, determining your loan amount requires some complicated math beyond the scope of this post. However, here's an easy House Affordability Calculator that'll do the math for you.

If you care to know, here's how the house affordability calculator works:

Once you know your maximum PITI, you'll need to accurately determine your principal, interest, taxes and insurance. To do this you'll need to know the loan terms that you're being offered, such as your interest rate and how many years your loan will be for.

Next, you'll need to determine your insurance and property tax. Your insurance is easy as getting a quote from a mortgage insurance company and dividing that number by 12 months. However, your property tax is really tricky to figure out since property taxes are a percentage of the value of the home you're buying, but you don't know how much of a house you can afford yet!

With the help from math wizard Hugh Chou we use a technique called iteration which essentially means that we guess how much of a home you can afford, and then we keep on guessing until we converge onto a number that makes all the math work.

At $6,000 per Month Income You Can Afford Approximately $302,498

If you make $6,000 in gross income per month at a 36% DTI ratio, your maximum affordable debt payment is $2,160. Then, backing out $350 in other debt payments you maximum PITI payment is $1,810. Based on 30 year fixed mortgage at 4.5% with 1.1% in property taxes, you'll be able to afford a mortgage loan amount of $302,498.

Be Smart and Don't Over Extend

Understanding how much house you can afford is the responsible thing to do. Knowing you'll be able to afford your monthly mortgage ensures you'll only get a mortgage which you have high confidence that you'll be able to afford.

Having that peace of mind makes buying your first home or upgrading into a new home a pleasant and exciting experience.

Real Estate Commission: Explained, Revealed and Compared
By Arvin Sahakian · Aug 17, 2015 · Real Estate Data

Real estate agents receive commissions from home buyers and sellers, collectively earning over $50 Billion per year. Learn how commission amounts are set, who pays them, and how they work in this article. Read more.


California Property Tax: Complete List by County 2014-2015
By Tim Nguyen · Nov 26, 2014 · Real Estate Data

List of secured property tax rates for all counties of California fiscal year for 2014-2015. Read more.


California Proposition 60 and 90: Your Complete Guide
By Tim Nguyen · Nov 28, 2014 · Real Estate Data

If you live in California and are over the age of 55 you can effectively reduce your property taxes when buying a new home. Read more.


Houston vs. Dallas: Which One is Better to Live in?
By Amanda Curry · Oct 11, 2016 · Real Estate

Houston Vs. Dallas? If you are considering moving to either of these major metropolitan areas, we've created a resource to help you make the decision process a little easier. Read more.


What to Expect During the Home Loan Closing Process
By Arvin Sahakian · Feb 24, 2015 · Mortgage

You've heard the term used before, but what does loan closing mean? Find out all you need to know about the process. Read more.


5 Illegal Borrowing Activities: Things That Are Illegal When You Try to Get a Home Loan
By Laura Agadoni · Jan 22, 2016 · Mortgage

Whenever there is money to be made or money to be spent, some unscrupulous folks will take advantage, trying to game the system or commit all-out fraud. Read more.


The Surge in Foreign Real Estate Investment in the United States
By Laura Agadoni · Feb 24, 2016 · Real Estate

Foreign real estate investment in the United States, both commercial and residential, is a huge phenomenon that is only expected to accelerate, maybe even to skyrocket, in 2016. Read more.


Does Homeowners Insurance Pay Off your Mortgage if the House is Burned Down?
By Amanda Curry · Feb 8, 2017 · Mortgage

In this article, we explore how homeowners insurance works and what happens in the event of a house fire. Read more.


16 Ways to Improve Your Debt-to-Income (DTI) Ratio
By Veronica Nguyen · Nov 29, 2014 · Mortgage

Your DTI is used by mortgage lenders to determine whether you qualify for a loan, and if so, for how much. Improve your DTI with these 16 tips. Read more.


6 Creative Financing Solutions For Your Next Home Purchase
By Laura Agadoni · Mar 22, 2016 · Mortgage

In this article we explore some creative financing options for your next home purchase. Read more.