How Much Should You Spend on a House?

Spend HouseBuying a house is one of the biggest purchases that you’ll ever make (and most likely the biggest). After you already come to the decision that you want to buy a house instead of rent a home, the next question is how much will you spend on your new home?

With the housing and economic crisis that is happening all around us, knowing how much you can afford on a house is very important. No one wants to spend too much and then just a couple of years later to be foreclosed on or to be extremely struggling in a place that they have found to love.

Determining how much you can afford depends on your personality (because of differences in what a person likes in a house and how much individuals believe they can spend) and especially how much money you make and spend.

Below are some tips to keep in mind when you are trying to determine how much to spend on your future home:


1. You Can Spend Less Than Your Pre-Approval Amount

We were pre-approved for a lot more than what we could realistically afford. We knew for a fact that we did not want a house for the price that we were approved for. We ended up happily buying a house that was around 20% less than what we were approved for.

I’ve had friends who were pre-approved for homes that were $300,000, when the couple only made $40,000 altogether (still in college). The bank told them they could afford this, and believed they could as well. That was of course until they told me that and I sat them down and told them that their monthly after-tax income BARELY paid for their mortgage payment, and didn’t include any property taxes, etc.

There are a lot of housing costs to be thought of, so even if you are approved, you should keep all housing costs in mind. These include: property taxes, maintenance, possible increased electricity and gas bills, repairs, etc.


2. The 34% Rule

I’ve heard different amounts from different people. Sometimes it’s 34%, sometimes it’s 33% and sometimes 28%. This rule is that you shouldn’t spend more than this percent of your income. Of course it all depends on where you live, but generally try to have your housing costs be less than a third of your monthly pre-tax income.

Of course this rule all depends on where you live, as some areas have much higher housing costs than others. However, with your housing costs being less than a certain percentage of your income, it allows for comfortability.

If your housing costs are 50% of your pre-tax income, this can be a dangerous place to be in. If anything happened, such as a job loss, an event medical-related, etc., you would be in a tough place in your financial life.

We currently spend around 10% of our monthly AFTER-tax income on our house. However, when we first bought our house, this number was at around 35%. We have significantly increased our income and this has helped us greatly. We were not comfortable with dedicating so much money to our house when it was at 35%.


3. Think About Your Debts

The third of your income rule also depends on how much your other debts total to as well. If you currently have $50,000 in student loans, $25,000 in car loans, and even more in credit card debt, then a house that equals one-third of your income may be too much for you and your family.


How did you determine what to spend on your home? What percent is your housing cost?

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  1. If we bought what we were pre-approved for I’d be bankrupt right now! I also don’t understand why pre-approvals are done on gross income (vs net)…

  2. I’m certain that my home purchase back in October of 2006 was unaffordable, even though we were approved. With property taxes and home owners insurance, our mortgage payment was around 50% of our take home pay. Today, we don’t live in the house and we rent it out. However, we still pay a portion of the mortgage since we cannot rent it for higher. It’s just one of those things where you live and you learn sometimes. Thankfully, today I’m more aware of personal finances and how things should be and can warn others of my mistakes.

  3. Did you get a 15 or 30 year mortgage Michelle?

    • We have a 30 year mortgage. We didn’t even think about getting a 15 year, which we probably should have! I just looked and the difference between a 15-year and 30-year mortgage (at the then rates) for us would be a difference of only $200 per month, which is not very much at all.

  4. We haven’t decide on a price for a home yet. we are just starting to look for one. But for us we took the amount we wanted to save, invest and put into our 401k and then we look at what we bring home after that. We are not willing to lower our savings so the house will have to fit within our budget and not us budgeting for the house. We are also thinking of going with a 15yr fixed rate.

  5. I think #1 is the single biggest reason so many people got into trouble with their homes. Most people haven’t done the research to know how much they can actually afford, so whatever the bank tells them is what they go with. I have a feeling that my fiance is going to fall prey to that a little bit as well, so I will have to stay strong! We’ve already discussed how much we’d like to spend on a home, so we just have to make sure we stick to that and don’t get tempted by the banks.

  6. Dean Saliba says:

    House prices are very low here in the UK, a quick check on a site like or will show that there are houses for sale in some areas of the country for as little as £20,000!

    There was even an article on one of our national newspapers (Daily Mail) about a street in the UK where the houses are going for under £5,000 because the high crime rate.

  7. Great tips! This post helped me realize that I am making the right decision and budget for our next home. We are saving more for our down payment because we are looking into a 15-year mortgage so that we will not be required to pay higher mortgage. Thanks for sharing!

  8. We just closed on our first house. Costs come in under 10% of our gross income. We picked a price range by looking at our budgets and decided on a top monthly amount we would pay for housing. From there i subtracted estimates for insurance and taxes and then used one of those how much can i afford calculators. Then we searched for anything about 90% of that amount or lower. We ended up finding a place about 65% of our very top range. It needs fixing up, but it’s very much what we were looking for. Since it’s so much cheaper than we could afford, we have the money to fix it up. :)

  9. When we bought out house, the monthly mortgage (+escrow) was about 25% of our pre-tax income; as we look to sell this one and move into one that better fits our family (we were newlyweds without kids or pets when we bought it – now we have two kids, a dog, and I work exclusively from home), I’m hoping to allot no more than 25% of our income to our mortgage this time, too.

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