How Much Home Can I Afford?

image of a young home buyer with a quote that reads "Nothing has a greater impact on your wealth and consumption than your choices of house and neighborhood" by Thomas J. Stanley, Ph.D.

How to buy a home like a Millionaire!

Are you asking yourself, “How much home can I afford?” With so much conflicting information on the internet about when to buy and how much you can afford, this guide is intended to cut through all the noise and provide you with four, easy-to-use steps to help you buy your home like a millionaire!

This guide relies heavily on the studies of Thomas J. Stanley, Ph.D., millionaire researcher with decades of experience studying and marketing to millionaires in America. Unlike other guides out there, where the writer merely gives their opinion, this blog post relies on the tried and true principles of the average millionaire in America based on scholarly research.

So rather than simply relying on someone else’s best guess, or forging your own path to wisely purchasing a home, follow hundreds of millionaires in America that have done it well.

But First, Do You REALLY Want to be Rich?

This is an honest question. Most people say they want to be rich or think they do. However, according to Thomas Stanley in The Millionaire Next Door,

“Most of us want to be wealthy, but most of us do not spend the time, energy, and money required to enhance our changes of realizing this goal.”

Case in point: Most people know that it’s in their best financial interest to buy the least expensive home they can afford, pay it off, and live in it for a long time, interest free. In practice, however, the average homeowner in America tries to get into the largest house they can qualify for. Worse yet, they let the bank tell them how much they can afford to pay!

a woman lying in an endless pile of American paper moneyThis is a very bad idea.

It’s like going to a car dealership and asking the salesperson which car you qualify to purchase. They’re going to stretch the terms and up the APR as much as humanly possible in order to sell you the most expensive car on the lot.

Likewise, the bank can tell you what you qualify for, but they honestly don’t care if you pay back your loan because it’s insured against default by the federal government. If you default, the bank still gets their money.

Consequently, it’s in the bank’s best interest to lend you the most they possibly can so they can get the biggest commission and most amount of interest from the loan that they can.

There is a better way:

The Simple Four-Step Process To Owning Your Home Like a Millionaire!banner icon with a house and a heading that reads "the simple four-step process to owning like a millionaire!"

But first, some words of wisdom:

If you can’t afford a home without following these simple steps, you can’t afford to buy!

Can’t afford a home in your area? No sweat.

Either buy somewhere more affordable or rent until you have all four steps covered. You may hate me now, but you’ll thank me for this later when everyone else is freaking out that there’s a recession and you’re sitting pretty.

1. Get Out of Debt

I realize with this one statement, I’ve a pile of shred credit cards beside a pair of scissorsalready lost you.

You’ve got school loans, credit card bills, and two car notes. You’re just trying to live the American Dream. And you feel that buying your next home is just the next logical step. However, the short and sweet of it is, it’s just not the right time for you.

The Forbes 400 (400 wealthiest people in America) were asked the question, ‘What is the most important key to building wealth?’

Their number one answer:

Becoming and Staying Debt Free.

If 75% of the Forbes 400 believe it, you should too. Which means, you need to focus on getting out of debt first, instead of piling more of it on.

For more info on how to get out of debt, check out Dave Ramsey’s 7 Baby Steps.

2. Have a Large Down Payment

Before buying that beautiful home in the Owl Creek Subdivision, make sure you have a large down payment of 10% – 20% of the total purchase price of the home. You will be much more likely to be approved for the home you want.

There is also an “ouch” moment that happens in your brain when you liquidate all that cash in your account to buy a home. It’s your brain realizing that these aren’t just numbers on a piece of paper, they are dollars leaving your account. This can help you settle on a more affordable home, which is a good thing.

Additionally, if you start saving up the amount you are hoping to pay in a mortgage payment every month, it will help you get a feel for how well you can handle that size of a payment before getting in over your head.

a buyer handing a wad of cash as a down paymentA large down payment also helps you avoid Private Mortgage Insurance (PMI), which can be hundreds a month in added cost.

Lastly, a large down payment builds in equity on the front-end. So if the market drops 10% year-over-year and you want to move, you’re not stuck in something you can’t sell. This way, whether you stay where you are or move to get that new dream job, you will have something others don’t… a choice.

3. Get a 15-Year Fixed-Rate Mortgage

Due to compounding interest, paying the first 20% off of a loan only takes about 4 years on a 15-year mortgage, but it takes 10 years to pay off that same amount on a 30-year mortgage!

home buyers signing closing documents on their new homeAnd that’s assuming the two loans are at the same rate, which almost never happens. Historically, 15 year loans typically carry a lower interest rate, allowing you to pay even less.

If you didn’t read the above sub-heading, the key here is fixed-rate. The last thing you need is an interest rate that goes up over time or a balloon payment the year you get laid off from your job. Ouch!

4. Your Mortgage Should Be 25% or Less of Your Take-Home Pay

Did all the air just get sucked out of the room, or was that just me?

Yes, you read that correctly.a potential home buyer with thoughts of house and car loans in sketches over his head Most conventional loans already have a 28/36 rule in order to get approved. That means the mortgage company won’t let you have more than 28% of your income going to mortgage debt and no more than 36% of your total income going to all debts combined (including the mortgage).

However, this rule is after taxes.

Instead, you should take Dave Ramsey’s advice on home buying and calculate your monthly payment based on your take home pay, instead of pre-tax dollars. This results in a much more manageable payment for you, especially if you are in a higher tax bracket. While it might mean choosing a home in Rivendell Woods over Brookview Forest, you’ll thank me for it later.

Want a quicker way to figure out how much home you can afford?

a lightning bolt icon next to a heading that reads "want a quicker way?"
According to Thomas J. Stanley, Ph.D., in his book Stop Acting Rich,

“The market value of the home you purchase should be less than three times your household’s total annual realized income.”

So don’t spend more than three times what you make in a year.


Following Stanley’s reasoning, if you and your spouse make $100k per year X 3 = No more than $300k should go towards your home.

However, if you make $100k/year, you’re likely only taking home about $82k/year after taxes.

Plugging that into the equation from #4 above, you need to multiply your after tax income ($82k) by 25% and divide it by 12 (months in a year) to arrive at a payment of no more than $1,708/mo.

At current interest rates, that equates to about a $240k mortgage on a 15-year loan.

So really, if you take your current annual income, multiple it by 2.5x, you’ll be very close to what your maximum budget should look like when purchasing a home.

a calculator icon next to a heading that reads "home buying equation"

Home Buying Equation: Annual Household Income X 2 = Max. Purchase Price of your Home

For the ultra-conservative, Stanley tells his readers in The Millionaire Next Door,

“If you’re not yet wealthy but want to be someday, never purchase a home that requires a mortgage that is more than twice your household’s total annual realized income.”

As a CPA and a Realtor, I recommend this philosophy to my clients above all others.

So instead of wondering, “how much home can I afford?” Use this simple equation and you’re 80% there!

As stated above, if you can’t afford to buy a home by using this formula, you either need to buy somewhere more affordable or simply rent for the time being. If Warren Buffet can live below his means, so can you.

Happy House Hunting!

27 thoughts on “How Much Home Can I Afford?

  1. Hi Kenny – If people bought houses using your advice a few years ago we would never have had the meltdown that took the whole market down. Just because a bank says you “qualify” for an out-sized mortgage, doesn’t mean you should take it.

    Buying beneath your means will allow you to keep your options open later, and that’s incredibly important. You’re doling out solid advice my friend!

    1. Thanks Kevin! I completely agree about the over-borrowing (obviously)! As an agent, it’s amazing to me how many people will ask the bank how much they can afford… That’s like asking a used car salesman which car he recommends. Very unwise.

      What’s really been getting my attention as of late is the whole stopping of QE3 by the Fed and what it will do to both asset values and interest rates in the near future. Don’t get me wrong, I was against QE from the start, but now that it’s finally over, it’s almost time to pay the piper for all that easy money…

  2. Love it man, so true. I disregarded every last item on that list (except for the being debt-free one) and is probably why my house was the worst purchase I’ve ever made. Fortunately we could afford it, but there was no way I needed a house @ $350,000 at that stage of my life. And especially not buying on a whim like I did! If only I had the millionaire mindset back then, sigh…

  3. I agree that letting the bank tell you how much you can afford or using most of the mortgage calculators out there is a bad idea — the amount of money you can qualify for is not necessarily the size of loan you should get.

    My husband and I followed these principles (except for the large down payment on our first house) and we are now mortgage-free. Our house size is average (maybe even below average compared to many of our friends) but I like having it paid for well before retirement.

    The title of the article may confuse some folks — you don’t have to be a millionaire to buy property in this manner; but the approach can allow you to save money in other areas of your life on your path to growing wealth.

    1. You’re right about the title. You definitely DON’T need to be a millionaire to put these principles into practice. It’s meant to show people habits of current millionaires so that readers can be one some day. Also, a paid for house… THAT’S AMAZING!!! One day I’ll be there.

  4. Your tips are a great way to make sure people don’t get in over their head. I’m glad we bought a modest home rather than the most the bank would give us a loan for. It gives us so many more choices!

  5. Kenny,
    All excellent advice. I disagree with the approach of a large down payment. Its not a bad approach, but I recommend folks play around with payoff calculators. It can be very eye opening. Putting 10% or even 20% down after you make the purchase can save 3x that amount in interest over the life of the loan. It also shaves off 10 years of the loan. You save more by shifting that amortization table to the right. You have the benefit of a 30 year loan monthly cost at a 20 year interval. All the money saved can be applied towards principle.

    Your approach is still a very smart move for most people especially if they use the PMI saving and lower payment saving from a smaller mortgage towards the mortgage. They can save around 8 years of payments by applying that towards principle.

    This assumes folks take the approach of being mortgage free rather than investing the extra money.


    1. You are correct, the main reason I recommend putting 10-20% down on the home is to make sure people qualify for a loan with no PMI, and larger downpayments also help them qualify for loans at better rates (VA loans at no money down are not usually competitive with the market).

      Thanks for your input!

  6. This is a great idea and I’ve never heard of these equations to apply to home ownership before! I’m going to keep them in mind when I start looking for a home.

    1. That’s awesome Mel! That’s why I felt this article was so important and am trying to get it out there. For almost everyone, their home is their single largest purchase. For most, it’s also their largest asset as well. My hope is that I can educate people, using the habits of millionaires, in order to persuade them to win in real estate and in personal finance.

  7. Hey Kenny, love your tips! We’re looking to buy another house (after we sell the one we currently have) in the next 5-6 years, and we’ve already run some calculations to see what we can afford. Definitely want to keep it under 25% of our take home pay! That’s really the best tip out there.

    The only thing I disagree with is buying a house while you still have debt… if we hadn’t bought the house we have now (while we both had and have school debt), we would be paying MORE in rent than we pay in mortgage payments. And we’re building equity. 😉

    Obviously, this is not the case for a vast majority of people, hence your recommendation. We just happen to get lucky and buy during a recession 🙂 We did have a large down payment, too!

    1. Melissa,
      Thanks so much for your valuable input! The main reason I recommend to get out of debt before purchasing a home is because, according to U.S. News, the average annual repair costs of a home is 1-4% of the value of the home. Plus, it makes it hard to pay down debts while you’re saving for a sizable down payment for a home. Lastly, most people end up paying as LITTLE as they can on a home. Consequently, they’ll have debt, get into a home for 0-3.5% down, the market drops 10% and a breadwinner loses a job, gets temporarily disabled, or falls ill. Suddenly, they go from being “in control” of their finances to being kicked out of their home and owing more for it than they originally paid. For these, and many other reasons, I just say to stay away from that mess! Oh, so does Dave Ramsey and his 8 million weekly listeners.

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