The last great recession in 2008-2009 was a result of people borrowing money for homes that they could not afford. The banks and the other lending institutions were equally responsible for lending the amounts to people who could not afford to pay back.
Therefore, as a responsible citizen, it is a great question to ask: how much home can I afford? By asking this you also do a favor to yourself and your family by not falling into a debt trap that you might not be able to escape from without declaring bankruptcy.
As a thumb rule, you should not have your monthly mortgage payment more than a third of your after tax earnings.
It also does not make sense to put all your savings in buying a house just to lower your monthly payments. It is important to keep a safe financial buffer just in case you need money in the future for a rainy day.
How Much Can I Afford For A House?
If you have a nice income and not many regular expenses to take care of, you should figure out how long would you be in such a situation. For example if you have just started earning at the age of 21, you might be thinking you could afford to put at least fifty percent of your income against a mortgage payment. However, since the mortgage payments often last for 15 or 30 years, your capacity to make monthly payments would change. Obviously you do not need plan for all 30 years right away but keeping at least the next 3-5 years in mind is very important if you think your situation will remain more or less the same.
The best way to have your dream home affordable for you is to start with a small home and build some equity in it while saving even more on the sides. When you have enough equity and savings that you can use as a downpayment for a much bigger house, you can sell off your smaller home and buy the one you dream of. If needed, this process can be broken into even smaller steps.
In a nutshell, keeping your monthly mortgage payment to about a third of your monthly income has proven to be an effective strategy historically. There is little doubt that this time tested method will work in the future too.
