## Mark R. Chaffee, CMP

Owning a home is often cheaper than renting a comparable one, but figuring out just how much home you can afford isn’t always easy. While rents are priced in simple monthly amounts, home prices need to be broken down into upfront and monthly payments. So how much home can you afford to buy? Here are some simple guidelines you can use to find out.

Monthly payments

The first step to determining how much home you can afford is calculating your monthly housing budget. One common guideline is the 28% rule, which states that you shouldn’t spend more than 28% of your gross (before taxes and deductions) monthly income on total debts, including your mortgage, credit cards and other loans.

Therefore, if your household has a gross monthly income of \$6,000 and no other debt, you could expect to afford a \$1,680 monthly mortgage payment (\$6,000 x 0.28). Using Draper and Kramer Mortgage’s payment/amortization calculator, we can see that this monthly payment roughly equals a \$280,000 loan amount for a 30-year mortgage with a 6% interest rate (6.111% annual percentage rate). This means you could expect to afford the monthly payment on a \$280,000 home with no down payment or a higher-priced home with a down payment (such as a \$350,000 home with a 20% down payment and the same \$280,000 loan amount).

Keep in mind that the 28% guideline is just a rule of thumb, and the exact monthly payment you can afford and loan amount you can qualify for will vary up or down based on your specific situation.

Upfront payments

Once you know you can afford the monthly cost of owning a home, you need to ensure you have enough cash to cover your share of the upfront costs of the purchase. These costs include the down payment and the closing costs. The down payment is the portion of the home’s price you pay upfront, and closing costs are the fees you pay at the closing of your home purchase.

Down payments typically range from 20% of a home’s sale price down to as little as 3% or even 0%, and closing costs typically range from 2% to 5% of the price. Therefore, if you are considering buying a \$280,000 home and expect to make a 3% down payment and pay 3% in closing costs, your estimated upfront cost would be \$16,800 (\$280,000 x 0.06).

If coming up with that much cash is beyond your reach, don’t count yourself out just yet. Options may be available to help cover your upfront costs, including down payment assistance programs, lender-paid closing costs, gift funds and/or seller credits. Your lender can show you which of these options are available to you, explain their pros and cons and tell you how far you can expect them to go in covering your closing costs.