Once you've made the decision to purchase a home, the subsequent step involves determining what you can genuinely afford. To assist you in beginning this process and making it more manageable, here are five essential guidelines to consider when figuring out how much you should allocate toward a house purchase.

1. Understand what percentage of your income should go toward your mortgage

To estimate how much you can afford for a mortgage payment every month, begin by totaling your gross annual income from all sources, such as salary, wages, tips, and commissions. If you have a spouse or partner whose income will also help pay for the mortgage, be certain to incorporate that amount too. Divide the sum by 12 to obtain your monthly income, and utilize that number as the foundation for your mortgage computations.

After you have established your monthly income, it's time to apply the 28/36 rule. As per this guideline, you should not devote more than 28% of your monthly income to housing expenses and no more than 36% to all existing debts, including your mortgage. By adhering to these limits, you will have adequate money for groceries, fuel, vacations, and saving for your future needs.

Example: Suppose you and your spouse are considering buying a house in Anaheim and have a combined monthly income of $6,000. Using the 28/36 rule, you would not want to exceed $1,680 on housing-related costs ($6,000 x .28) and $2,160 on total debt obligations ($6,000 x .36).

2. Use an affordability calculator to calculate how much house you can afford

By entering details like your location, annual income, down payment savings, and current monthly expenditures, our home affordability calculator can give you a summary of the type of house you can afford to buy.

Including additional filters such as monthly homeowners' insurance, mortgage interest rate, private mortgage insurance (if applicable), loan type, and the property tax rate can further enhance your calculations. The more information you provide, the nearer you will be to discovering the perfect amount of house you can afford.

3. Consider current mortgage rates

The mortgage interest rate is the fee imposed by a lender for providing money to a purchaser. It is represented as an annual percentage of the total loan amount but is incorporated into the monthly mortgage payment.

The mortgage rate provided is a crucial element in deciding whether you can afford to purchase a home. It is vital to recognize that even a minor variation in the rate, for instance one basis point (one-hundredth of a percentage point), could determine if a home is affordable or not. Make sure to compare options and consult with multiple lenders to secure the best available rate.

4. Factor in additional costs of homebuying

It's not solely about the purchase price of your home. Listed below are the typical expenses linked with buying a house.

The largest initial expense is the down payment. When buying a home, a down payment is the cash you contribute toward the purchase price. Among the different loans offered, you can encounter down payment requirements varying from 3-20% of the home's purchase price. If your down payment is under 20%, you will probably have to pay private mortgage insurance (PMI). This insurance safeguards the lender if you fail to make your mortgage payments. The cost of PMI ranges from 0.5% to 1% of your annual mortgage, and this sum is included in your monthly payment.

Remember to include closing costs. Closing costs generally comprise lender and escrow fees, insurance, and taxes—all of which are required to complete the home sale and transfer legal ownership to you. Anticipate paying between 3-6% of the home's total purchase price for closing costs. If you are buying a $500,000 home in Austin, for instance, you can expect to pay approximately $15,000–$30,000 in closing costs. These expenses are payable along with your down payment when you finalize the home purchase.

5. Remember, being a homeowner comes with recurring expenses

When the closing day concludes, your duties are not over. Ensure you set aside sufficient funds in your budget to handle your monthly home expenditures. Furthermore, it is prudent to save some money for future repairs and improvements to your house.

Utilities. If you have previously been renting, you might not be acquainted with the cost of utilities as a homeowner. Estimating these expenses can be challenging because some landlords include sewer, water, and garbage fees in the rent. As the new homeowner, you should budget for these utilities in addition to your mortgage, plus internet, cable TV, natural gas, and electricity costs.

Property taxes and insurance. When acquiring a home, at closing, you will be required to pay an initial portion of the property taxes and homeowners insurance. Nevertheless, you will need to maintain these payments for as long as you own the property. Property taxes and homeowners insurance can fluctuate based on your home's value, its location, and any annual changes that might occur.

Home maintenance and emergency repairs. As a homeowner, it is your duty to address issues when something malfunctions or gets damaged. This might result from a faulty major appliance, a plumbing leak, a broken air conditioning unit, or storm damage such as torn roof shingles or uprooted trees. Moreover, it is essential to reserve funds for periodic tasks, like cleaning gutters, carpets, and pressure-washing the deck. For a detailed list of home maintenance duties, refer to a home maintenance checklist.

How much should you spend on a house: the bottom line

Numerous factors affect how much you should spend on a house, and the answer is individual. However, understanding the fundamental expenses can assist you in deciding if this is a favorable time to buy and might even help you save money when acquiring your new home.

Redfin does not provide financial advice. This article is for informational purposes only, and is not a substitute for professional advice from a financial advisor.