When looking at how much house you can afford, there's a few primary items to consider:
You can use our handy financial planning worksheet to work out the numbers in detail to make sure you are accounting for all your expenses and assets too.
You can easily look up how much money you have in savings, but that isn't the amount that you should put down on a house. No first you need to subtract out an emergency fund. Home buyers should be sure to account for unforeseen circumstances and keep a reserve or an emergency fund. As a good rule of thumb, we recommends having three to six months of expenses, including your housing payments/other monthly debts, in reserve. This will give you a buffer to cover your mortgage payments in case of an unexpected event.
For example, if your monthly expenses including your anticipated mortgage payment are $3,000, you should keep 3 x $3,000 = $9,000 to around 6 x $3,000 = $18,000. If you have $50,000 saved, you can put down anywhere from $32,000 to $41,000 for down payment plus closing costs.
Of course this doesn't tell you how much you can afford. First you need to determine what kind of loan you qualify for.
If you are going to put 3% down and get an FHA loan, using the savings numbers above, you could buy a home between $1,066,000 and $1,366,000. But if you are putting down 10%, you would be in the $320,000-$410,000 range. For a traditional 20% down, you would be between $160,000-$205,000.
So as you can easily see, your down payment alone can't determine how much home to buy. Next we must consider your income.
Knowing your monthly take home pay is crucial for understanding what mortgage you can afford. If your monthly take home pay is $4,000 and the general rule of thumb says your mortgage should be less than 28% of your take home pay, or $4,000 x 0.28 = $1,120 per month. At a conservative 4% interest rate and 20% down, you could afford $300,000 if you had $60,000 to put down.
If you put $39,000 or 15% down, you could buy a $260,000 home at a $1,055 monthly payment.
Plugging back into our scenario above where total monthly expenses are $3,000 including your house payment, if your other monthly expenses amount to around $1,900, then all of the numbers are working out nicely and pointing to a target home price of $260,000.
In this scenario, you could also put down only 10% or $26,000 and still have a payment of $1,117 and an additional $39,000 - $26,000 = $13,000 to add to your emergency fund or invest elsewhere. And, since your take home pay is $4,000 per month, you'll still continue to save $1,000 per month.
As you can see from this walk-though, there are a lot of dependencies, but your mortgage broker can help you get to these numbers quickly.