The Five-Minute Test
How much house can you afford?

This step-by-step worksheet will give you a rough estimate of how much house you can afford. A hand-held calculator will help make the arithmetic easier. The worksheet should take about five minutes to complete.

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Step 1

Enter your gross monthly income (before taxes) on Line A.

A                                      

Step 2

Multiply Line A by 28 percent and enter the result on Line B

A                                       x .28 =  B                                      

The result is about how much you can afford for a monthly housing expense. That includes principal and interest, taxes and insurance.

Step 3

Multiply Line B by 80 percent and enter the result on Line C.

B                                       x. .80 =  C                                      

The result is about how much you can afford for a monthly principal and interest payment.

Step 4

• To figure an estimated mortgage amount, choose an interest rate from the mortgage payment calculator.

• Enter the corresponding factor number on Line D.

• Divide Line C by Line D and enter the sum on Line E.

• Multiply Line E by 1,000 and enter the result on Line F.

D                                      
Line C divided by Line D = E                                      
Line E x 1,000 = F                                      
Line F is about how large a mortgage you can afford.

Step 5

• To figure out how much house you can afford, decide how much of a down payment  you want to make.
  If you want to make :
  5 percent down payment, divide Line F by 95 percent;
  10 percent down payment, divide by 90 percent;
  20 percent down payment, divide by 80 percent

• Enter the result on Line G

i.e. Line F divided by .95 or .90 or .80 = G                                      
Line G is about how much house you can afford.

Step 6

• One more consideration: Go back to Line A.

• Multiply Line A by 36 percent and enter on Line H. *

• Now add up your monthly obligations, such as credit card bills and car payments (do not include food or utility bills) and enter that on Line I

• Add Line I to Line C and enter the amount on Line J

i.e. Line A x .36 =
H                              
I                               
Line I + Line C =
J                              

If Line J is greater than Line H, your monthly obligations may exceed your ability to qualify for the mortgage you want. You can either reduce the mortgage amount you apply for or investigate how to reduce your monthly obligations.

* The percentages used in this example are part of the formula lenders use to qualify prospective borrowers for a conventional loan.

Remember, this step by step process is just a guide. A more thorough estimate of how much house you can afford can be obtained from a real estate agent or mortgage lender.