What You Can Afford
When you begin to look for a home, a commonly used rule of thumb says you can afford a house that costs up to two and one-half times your annual gross income --- the 2.5 Rule.
According to this rule, with an annual combined gross income of $40,000, you can spend up to $100,000 on a home.
However, this is the maximum you should consider for a home. If you have existing debt, it will reduce the amount of monthly income available for housing expenses, and you will need to adjust your maximum home price accordingly
.| Gross Yearly Income | Highest Possible Cost of Home | |
| $30,000 | x 2.5 = | $75,000 |
| $40,000 | $100,000 | |
| $50,000 | $125,000 | |
| $60,000 | $150,000 | |
| $75,000 | $187,500 | |
| $100,000 | $200,000 |
Some books use the 2.5 rule as a predictor of the maximum mortgage amount. However, it is probably wiser to use the 2.5 rule to calculate the maximum amount you can pay for the house. Then, subtract the amount or percentage of your down payment to find out the maximum mortgage you should consider.
To find out your maximum house price, simply multiply your combined gross yearly income by 2.5. Remember, this is just a rough gauge and it is a maximum. Don't make the mistake of getting into a home that takes every available penny.
People are called, "house poor" when they have spent so much on a house that they have nothing left for vacations and other discretionary spending.
