Ep.61- Rule of Thumb on How Much House You Can Afford
Read Time: 3 Minutes.
If you are looking to buy a condo/house, the first question you'll ask yourself is what's the price range you should be looking at. With 4 years of experience dealing with a multitude of lenders, I've realized there's a pretty simple rule of thumb, without getting into complicated calculations.
5 TIMES OF YOUR PRE-TAX SALARY
Typically, you can afford a house that's worth of 5X of your pre-tax salary. For example, if you and your significant other bring in $100k together, your upper ceiling should be $500k (5 x $100k). Simple as that.
There are two major factors that can increase or decrease what you can afford: size of your down payment, and monthly payment towards debt.
- Down Payment: If you have a lot of money for a down payment, say $200k, then you can add that on top of $500k ($100k x 5) , to shop for a $700k house.
- Monthly Debt: If you have a lot of debt, say $600/month, you need to scale back. As a rule of thumb, every $600/month in debt will decrease your max price by $100k. For example, with a person making $100k/yr, and $600/month in student loans, he/she can afford a max of $400k house ($100k x 5 - 100k).
7 TIMES OF YOUR AFTER-TAX SALARY
There's an another rule of thumb based on your after-tax pay, instead of pre-tax salary. Your max home price is about 7 times of your after-tax salary.
For example, if you make $100k/yr pre-tax, and bring home $70k/yr, you then can afford a house up to $490k ($70 x 7). It's usually pretty close to the 5x rule of thumb.
If you want to get a more precise number, i would recommend using this free Redfin calculator.
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