How to Determine the House You Can Afford

Understanding how much house you can afford involves evaluating your financial health, considering your debt-to-income ratio (DTI), and setting a realistic budget. Here's a breakdown of the key steps and factors:

1. Assess Your Financial Situation

• Income: Calculate your gross monthly income (before taxes).
• Monthly Debts: List your recurring monthly debt payments, including:
  • Rent or house payments
  • Child support/alimony
  • Student loans
  • Car payments
  • Any other fixed debts
• Expenses: Track your variable monthly expenses such as groceries, utilities, and entertainment.

2. Calculate Your Debt-to-Income Ratio (DTI)

1. Step 1: Add up all your monthly debt payments.
2. Step 2: Divide your total monthly debts by your gross monthly income to get your DTI.

   For example, if your total monthly debts are $2,000 and your gross monthly income is $6,000, your DTI is 33.3%.

3. Apply the 29/41 Rule

• Housing Expense Ratio (29%): Your mortgage payment (including principal, interest, taxes, and insurance) should not exceed 29% of your gross monthly income.
• Total Debt Ratio (41%): Your total monthly debt payments, including your mortgage, should not exceed 41% of your gross monthly income.