To arrive at an “affordable” home price (that is, how much home you can afford), we followed the guidelines of most lenders. In general, that means your total debt payments should be no more than 36% of your gross income.
Once you enter your monthly debt (including credit cards, student loan and car payments), we come up with a maximum monthly home payment you could handle while staying under that threshold.
Why do lenders use this guideline? It’s been shown to be a level of debt that most borrowers can comfortably repay.
That home payment assumes a 30-year mortgage at current rates, and includes 1% property tax and 0.4% for homeowners insurance.
It does not factor in private mortgage insurance, which you’ll owe if your down payment is less than 20% of the purchase price.
You should reduce the maximum target if you have other savings needs (such as retirement and college) or additional expenses (such as child care, private school tuition, health care, or alimony payments).