ABA Family Legal Guide

Buying and Selling a Home

Financing a Home Purchase

The Basics

Is there a formula for determining what I can afford?

The loan amount a lender will agree to provide is directly tied to your income and expenses. The prevailing rule says that a home should cost no more than 2.5 times your annual income. Typically, a lender expects you to pay no more than 28 percent of your gross income for housing, which includes the loan payment, the property tax, the homeowner's insurance, any monthly dues or assessments, and estimated utility costs.

A lender looks for a solid history of income, employment, and credit. Therefore, the amount of your debt and ongoing expenses are relevant, including automobile payments, credit card debt, education loans, child support, alimony, and so on. As a general rule, your total indebtedness, including monthly housing expenses, should not exceed 36 percent of your gross income.