Some key things to consider when calculating what YOU can afford include: household income, funds available, debt, and credit.
Income – Money that you receive on a regular basis, such as your salary or income from investments. Your income helps establish a baseline for what you can afford to pay every month.
Funds available – This is the amount of cash you have available to put down and to cover closing costs. You can use your savings, investments or other sources.
Debt and expenses – It's important to take into consideration other monthly obligations you may have, such as credit cards, car payments, student loans, groceries, utilities, insurance, etc.
Credit profile – Your credit score and the amount of debt you owe influence a lender’s view of you as a borrower. Those factors will help determine how much money you can borrow and what interest rate you’ll be charged. Check your credit score.
You must be comfortable with what you feel you can spend monthly. While your household income and monthly debts may be stable, your overall savings and how much you wish to allocate toward your home can vary depending on how much you want to set aside for a rainy day or how much you want to set aside for a future expenditure. This is up to you, but needs to be considered during the buying process.
If your average household income is $56,500 annually, according to the 36% rule (the 36% rule measures your debt relative to your income), you can afford approximately $1,695 in total monthly payments.
Many people follow the Three Months Rule. They always try to keep three months of housing payments, including your monthly expenses, in reserve. This will give you an additional buffer in case there is some unexpected event.