When considering buying a house, it’s crucial to determine how much you can afford. One common guideline is that the total value of your house should generally be no more than 3 to 5 times your total annual household income (Fidelity, 2023).
Key Facts
- General guideline: A common guideline is that the total value of your house should generally be no more than 3 to 5 times your total annual household income.
- Lender rules of thumb: Lenders often use certain rules of thumb to determine how much they will loan to a buyer based on their income and expenses. These rules include:
a. The 28% rule: Your mortgage payment (principal and interest) should not exceed 28% of your gross income.
b. The 28% / 36% rule: Your total household debt, including mortgage payment, should not exceed 36% of your gross income.
c. The 32% rule: All household costs, including mortgage, insurance, taxes, and fees, should not exceed 32% of your monthly income.
d. The 40% rule: The total amount of debt you pay each month, including your house, car, credit card, and student loan payments, should not exceed 40% of your monthly income.
e. The 2.5X rule: Choose a home priced at about 2.5 times your annual household income.
f. The 3X rule: If you spend more than 20% of your monthly income to pay down existing debts, you could potentially consider homes priced up to three times your household’s annual income.
g. The 4X rule: If you spend less than 20% of your current take-home income on debt, then you could potentially consider a home priced up to four times your household’s annual income.
h. The 5X rule: If you are entirely debt-free, you can consider homes priced up to 5 times your household income.
It’s important to note that these rules of thumb may vary among lenders, and it’s advisable to shop around and compare different options.
Lender Rules of Thumb
Lenders often use specific rules of thumb to determine how much they will loan to a buyer based on their income and expenses (Homelight, 2023):
The 28% Rule
Your mortgage payment (principal and interest) should not exceed 28% of your gross income.
The 28% / 36% Rule
Your total household debt, including mortgage payment, should not exceed 36% of your gross income.
The 32% Rule
All household costs, including mortgage, insurance, taxes, and fees, should not exceed 32% of your monthly income.
The 40% Rule
The total amount of debt you pay each month, including your house, car, credit card, and student loan payments, should not exceed 40% of your monthly income.
The 2.5X Rule
Choose a home priced at about 2.5 times your annual household income.
The 3X Rule
If you spend more than 20% of your monthly income to pay down existing debts, you could potentially consider homes priced up to three times your household’s annual income.
The 4X Rule
If you spend less than 20% of your current take-home income on debt, then you could potentially consider a home priced up to four times your household’s annual income.
The 5X Rule
If you are entirely debt-free, you can consider homes priced up to 5 times your household income.
It’s important to note that these rules of thumb may vary among lenders, and it’s advisable to shop around and compare different options (Homelight, 2023).
Sources
- Fidelity. (2023). Before Buying a House. https://www.fidelity.com/viewpoints/personal-finance/before-buying-house
- Homelight. (2023). How Much House Can I Afford? 10 Rules of Thumb. https://www.homelight.com/blog/buyer-how-much-house-can-i-afford-rule-of-thumb/
- CNBC. (n.d.). Mortgage Affordability: How Much Can You Afford. https://www.cnbc.com/select/mortgage-affordability/
FAQs
What is a general guideline for how much house I can afford?
A common guideline is that the total value of your house should generally be no more than 3 to 5 times your total annual household income.
What is the 28% rule?
The 28% rule states that your mortgage payment (principal and interest) should not exceed 28% of your gross income.
What is the 36% rule?
The 36% rule states that your total household debt, including mortgage payment, should not exceed 36% of your gross income.
What is the 40% rule?
The 40% rule states that the total amount of debt you pay each month, including your house, car, credit card, and student loan payments, should not exceed 40% of your monthly income.
What is the 2.5X rule?
The 2.5X rule states that you should choose a home priced at about 2.5 times your annual household income.
What is the 3X rule?
The 3X rule states that if you spend more than 20% of your monthly income to pay down existing debts, you could potentially consider homes priced up to three times your household’s annual income.
What is the 4X rule?
The 4X rule states that if you spend less than 20% of your current take-home income on debt, then you could potentially consider a home priced up to four times your household’s annual income.
What is the 5X rule?
The 5X rule states that if you are entirely debt-free, you can consider homes priced up to 5 times your household income.