Some of the links on our website are sponsored, and we may earn money when you make a purchase or sign-up after clicking. Learn more about how we make money.
Dave Ramsey has a number of “rules of thumb” for managing your finances. Arguably, his most important rule answers the following question: “How much house can I afford?”
We spend a significant portion of our income on housing, so it’s important to answer this question correctly.
A recent Federal Reserve study found that the cities that suffered the most severe impacts from the 2008 financial crisis were those with the highest average personal debt-to-income ratios. And one common trait shared by residents of those areas was that they bought too much house.
With almost half of U.S. households carrying credit card debt, it’s easy to make the argument that the majority of home buyers purchased more house than they can afford. After all, mortgages are one expense that has to get paid — even if that means building up credit card debt.
Table of Contents
How Much House Can You Afford?
Dave Ramsey’s advice for buying a new home is to limit your monthly mortgage payment (including homeowners insurance, homeowners association fees and property taxes) to 25% or less of your monthly take-home pay on a 15-year fixed-rate loan.
This housing rule of thumb is quite different from the recommendations you’ll find elsewhere. Using the affordability calculator on DaveRamsey.com, you can calculate the maximum monthly house payment you can afford under these guidelines, which is all based on the simple question, “What is your monthly take-home pay?”
According to Ramsey, your monthly housing expenses should never be higher than 25% of your monthly after-tax income.So, if you take home $5,000 a month after taxes, you can afford a $1,250 total monthly housing payment.
Therefore, you hardly need to use the calculator to follow this rule. To find out your monthly maximum mortgage payment, just take your monthly-after-tax income and divide it by four.
| Monthly Net Income | Max Mortgage Payment |
| $4,000 | $1,000 |
| $5,000 | $1,250 |
| $6,000 | $1,500 |
| $7,000 | $1,750 |
| $8,000 | $2,000 |
| $9,000 | $2,250 |
| $10,000 | $2,500 |
Ramsey advises using your monthly take-home pay (also known as net income or after-tax monthly income) rather than your gross monthly income.
Gross income is the amount you make before taxes and other deductions, while net income is the amount you make after taxes and other expenses are taken out. To get this number, simply look at your recent paychecks.
How Much House Can You Responsibly Afford?
Dave Ramsey’s rule allows you to buy much less house than most mortgage lenders and real estate agents want to sell you — not to mention, much less house than other calculators will say you can afford.
Ramsey’s affordability calculator also gives you an estimate of how much house you can afford based on your monthly take-home pay:
In contrast, here’s what Realtor.com’s affordability calculator says you could afford based on the numbers shown in the example above.
For the sake of this exercise, we’ll base our comparison on the 20% down-payment calculation, as follows:
- $5,000 monthly income ($60,000 annually).
- $42,248 down payment, which represents a 20% down payment in Ramsey’s example.
- $0 Monthly debt. (Ramsey’s Baby Steps framework says you should be out of debt and have a fully-funded emergency fund before buying a home.)
Keep in mind, Realtor.com is showing you what you can afford on a 30-year fixed-rate mortgage. Ramsey, on the other hand, suggests a 15-year fixed-rate mortgage. Yet Realtor.com shows a mortgage payment that’s $579 higher than what Ramsey suggests.
Why such a difference? To understand that, it’s important to understand the guidelines used by mortgage providers.
Dave Ramsey Housing Guidelines vs. 28/36 Mortgage Rule
The standard debt-to-income ratio used in the mortgage industry is called the 28/36 rule. What this says is that your total monthly debt payments should not exceed 36% of your pre-tax income, with a maximum of 28% going towards housing.
Taking a closer look at this ratio, I recently wrote:
The first thing you need to know about the 28/36 rule is that it’s not a rule used in financial planning. Instead, it’s the rule mortgage lenders use to determine your home loan.
The rule states that you shouldn’t spend more than 28% of your monthly gross income on housing (this includes principal, interest, taxes, and insurance). Then, total loan payments (housing plus all other debt) should not exceed 36% of your gross income.
It’s important to look at this ratio from both a lender’s perspective and a consumer’s perspective. For lenders, the purpose of the 28/36 rule is to determine the largest amount of debt a person can have.
In other words, this is the largest amount of debt banks have found you can take on and still have a reasonable chance of paying back. Loaning you as much money as possible maximizes the bank’s bottom line, not your finances.
— The Personal Finance Ratios You Need to Know
The big takeaway here is that Ramsey’s guidelines are optimized to help you build wealth. With a lower mortgage payment, the idea is you’ll be able to avoid credit card debt and invest more over time. Not only will you have a lower monthly payment but also 15 fewer years of making payments.
The mortgage industry’s guidelines, on the other hand, are optimized to maximize their profits.
Dave Ramsey Mortgage Rule vs. 50/30/20 Budget
One of my favorite budgeting techniques is the 50/30/20 budget, which states that you should spend 50% of your income on needs, 30% on wants, and 20% on savings.
Where I find this budget strategy most useful is in helping people make big financial decisions by creating a hypothetical budget for their future.
Housing costs, which include home maintenance, fall within the 50% of your budget allocated to “needs.” However, so do other necessary monthly expenses, such as food, transportation and insurance.
If it turns out that your hypothetical budget has 65% of your income going towards needs, that leaves only 35% total for wants and savings. In other words, your opportunity cost for buying a larger home means sacrificing wants (e.g., travel and entertainment) or savings (e.g., you may have to delay retirement).
It’s not that you’ll necessarily be house poor; however, you’ll be constantly sacrificing other financial goals to make the mortgage payment every month.
How Much Down Payment Do You Need to Save?
What does Ramsey have to say regarding down payments?
To summarize his recommendations:
- The goal should be to save 20% of your home’s purchase price to avoid private mortgage insurance (PMI).
- If you haven’t saved 20% after two years of intense saving, it’s OK to go lower than 20% but not less than 10%. At less than 10%, you’ll be paying so much in fees, mainly PMI, that it’s not worth it.
Private mortgage insurance 101: Private mortgage insurance (PMI) is a type of insurance that borrowers are required to purchase if they have a conventional loan and made a down payment of less than 20%. This insurance protects lenders in the event that borrowers default on their mortgage. Homeowners with PMI are also typically required to pay an annual premium, which is added to their monthly mortgage payment. You eliminate the extra monthly cost associated with PMI once you have 20% equity in your home.
Keep in mind, these down payment figures are for a 15-year fixed-rate mortgage, which is the only mortgage term Ramsey recommends. In other words, the same 10% down payment rule doesn’t apply to someone applying for a 30-year fixed-rate mortgage, according to Ramsey.
Ramsey also doesn’t recommend FHA loans because of the impact of mortgage insurance.
Related: How to Save For a House – A Step-By-Step Guide
MONEY MANAGEMENT
Focusing on these five simple steps will help you set a goal and see it through.
Read More
Dave Ramsey Mortgage Rule vs. My Own Thoughts
For most people, their home is the largest purchase they’ll ever make. Just as important, since most homeowners borrow money, leverage is involved.
It’s for these two reasons that I agree with Ramsey’s premise that many people buy too much house. Doing so often forces them to sacrifice their other, and often more important, financial goals.
Yet, I can point to some scenarios where I’d break Ramsey’s strict adherence to a20% down-payment (or no less than 10% after two years of intense savings) and a 15-year fixed-rate mortgage.
If you live in a tourist destination or a more populated area, there’s also the opportunity to earn income from your home, with popular options being renting it out on Airbnb and renting unused space via Neighbor. This can alter your monthly cash flow significantly and should be taken into account if you’re choosing to go that route.
A 30-year fixed-rate loan is a legitimate option too. However, I advise a 20% down payment in this case or the ability to pay off PMI within a year or two.
Yes, it’s old-school. However, similar to paying off debt, when you save for a house, it’s your chance to really build your financial muscle. It takes time and requires discipline, but if you can save for a down payment of 20%, you’ve gone out and proved you can responsibly handle the financial ups and downs of owning a home.
If you’re a Dave Ramsey fan, three articles you’ll enjoy on The Ways to Wealth are:
- 17 Best Money Tips From Dave Ramsey of All Time
- Dave Ramsey Recommended Household Budget Percentages
R.J. Weiss
R.J. Weiss is the founder and editor of The Ways To Wealth, a Certified Financial Planner™, husband and father of three. He's spent the last 10+ years writing about personal finance and has been featured in Forbes, Bloomberg, MSN Money, and other publications.
FAQs
What does Dave Ramsey say about how much house you can afford? ›
Figure out 25% of your take-home pay.
To calculate how much house you can afford, use the 25% rule: Never spend more than 25% of your monthly take-home pay (after tax) on monthly mortgage payments. Following this rule keeps you safe from buying too much house and ending up house poor.
Housing. Housing (or shelter) should be no more than 25% of your take-home pay. This includes your rent or mortgage payments plus tax, insurance, HOA fees and private mortgage insurance.
How much house can we realistically afford? ›To calculate 'how much house can I afford,' a good rule of thumb is using the 28/36 rule, which states that you shouldn't spend more than 28% of your gross, or pre-tax, monthly income on home-related costs and no more than 36% on total debts, including your mortgage, credit cards and other loans, like auto and student ...
How much house can I afford making $70000 a year? ›If you're an aspiring homeowner, you may be asking yourself, “I make $70,000 a year: how much house can I afford?” If you make $70K a year, you can likely afford a home between $290,000 and $360,000*. That's a monthly house payment between $2,000 and $2,500 a month, depending on your personal finances.
How much do you have to make a year to afford a $500000 house? ›Generally speaking, mortgage lenders say that you can afford to buy a house that's 2.5 to 3 times greater than your annual salary. So in order to buy a $500,000 house, you would need to make at least $167,000 to meet the 2.5x income requirement.
How much house can I afford if I make $100000 a year? ›Start with the 28/36 rule
If you're earning $100,000 per year, your average monthly (gross) income is $8,333. So, your mortgage payment should be $2,333 or less.
40% of your income goes towards your savings. 30% of your income goes towards necessary expenses (food, rent, bills, etc.). 20% of your income goes towards discretionary spending (entertainment, travel, etc.). 10% of your income goes towards contributory activities (donations, charity, tithe, etc.).
How much money do you need to afford a 300K house? ›How much do I need to make to buy a $300K house? You'll likely need to make about $75,000 a year to buy a $300K house. This is an estimate, but, as a rule of thumb, with a 3 percent down payment on a conventional 30-year mortgage at 5 percent, your monthly mortgage payment will be around $1,900.
How much income do you need to buy a $650000 house? ›You need to make $240,520 a year to afford a 650k mortgage. We base the income you need on a 650k mortgage on a payment that is 24% of your monthly income.
Can I afford a 300k house on a 60k salary? ›To afford a house that costs $300,000 with a down payment of $60,000, you'd need to earn $44,764 per year before tax. The monthly mortgage payment would be $1,044.
How much income do you need to buy a $400000 house? ›
What income is required for a 400k mortgage? To afford a $400,000 house, borrowers need $55,600 in cash to put 10 percent down. With a 30-year mortgage, your monthly income should be at least $8200 and your monthly payments on existing debt should not exceed $981.
What would my yearly salary have to be to afford a $1 m house? ›Experts suggest you might need an annual income between $100,000 to $225,000, depending on your financial profile, in order to afford a $1 million home. Your debt-to-income ratio (DTI), credit score, down payment and interest rate all factor into what you can afford.
Can I afford a 400k house with $70 K salary? ›On a $70,000 income, you'll likely be able to afford a home that costs $280,000–380,000. The exact amount will depend on how much debt you have and where you live — as well as the type of home loan you get.
How much house can I afford with a 120k salary? ›Safe debt guidelines
If you make $50,000 a year, your total yearly housing costs should ideally be no more than $14,000, or $1,167 a month. If you make $120,000 a year, you can go up to $33,600 a year, or $2,800 a month—as long as your other debts don't push you beyond the 36 percent mark.
For homes in the $800,000 range, which is in the medium-high range for most housing markets, DollarTimes's calculator recommends buyers bring in $119,371 before tax, assuming a 30-year loan with a 3.25% interest rate. The monthly mortgage payment is estimated at $2,785.
Can I afford a 500k house on 100K salary? ›A 100K salary means you can afford a $350,000 to $500,000 house, assuming you stick with the 28% rule that most experts recommend. This would mean you would spend around $2,300 per month on your house and have a down payment of 5% to 20%.
Can I afford a 300K house on a 50k salary? ›To purchase a $300K house, you may need to make between $50,000 and $74,500 a year. This is a rule of thumb, and the specific salary will vary depending on your credit score, debt-to-income ratio, the type of home loan, loan term, and mortgage rate.
How much house can I afford making $90,000 a year? ›You can afford a $270,000 house.
Can I afford a 400k house on 100k salary? ›With a $100,000 salary, you have a shot at a great home buying budget — likely in the high-$300,000 to $400,000 range or above. But you'll need more than a good income to buy a house. You will also need a strong credit score, low debts, and a decent down payment.
What house can I afford with 200k salary? ›That said, if you make $200,000 a year, it means you can likely afford a home between $400,000 and $500,000.
How much home can I afford with 80k salary? ›
So, if you make $80,000 a year, you should be looking at homes priced between $240,000 to $320,000. You can further limit this range by figuring out a comfortable monthly mortgage payment. To do this, take your monthly after-tax income, subtract all current debt payments and then multiply that number by 25%.
Is the 50 30 20 rule realistic? ›The 50/30/20 rule can be a good budgeting method for some, but whether the system is right for you will be determined by your unique circumstances. Depending on your income and where you live, 50% may not be enough to cover your needs.
What is the $27.40 rule? ›As a general rule, you can save $10,000 in a year by saving $27.40 a day, $192.30 a week, $384.62 every two weeks, or $833.33 a month. It will take discipline, cutting back, and increasing income to make this happen.
What is the 50 15 5 rule? ›50 - Consider allocating no more than 50 percent of take-home pay to essential expenses. 15 - Try to save 15 percent of pretax income (including employer contributions) for retirement. 5 - Save for the unexpected by keeping 5 percent of take-home pay in short-term savings for unplanned expenses.
Can I afford a 300k house on a 100k salary? ›With a $100,000 salary, you have a shot at a great home buying budget — likely in the high-$300,000 to $400,000 range or above. But you'll need more than a good income to buy a house. You will also need a strong credit score, low debts, and a decent down payment.
How much is a 500k house monthly payment? ›The average mortgage rate for a $500,000, 30-year fixed-rate loan is around 5.4% for those with good credit. So, your monthly payment would be around $2250 without taxes and fees.
How much do you need to make to get a $600000 mortgage? ›Following this logic, in order to afford a $600,000 home, your income would need to be at least $350,000 per year, or higher.
How to afford a million dollar home? ›To afford a $1 million home you need a minimum annual income of $200,000 to $225,000. You'll also need to have enough money saved for the down payment and closing costs, which can add up to over 20% of the purchase price. There are a variety of reasons someone might want a million-dollar home in the first place.
Is 90k salary rich? ›In the U.S., the average individual's income is $63,214, and the median income is $44,225. As a result, a $90,000 salary would put you well above the national average, and while this money will go farther in some cities than in others, it's still typically considered a good salary.
How much do you have to make to afford a $850,000 house? ›To afford a house that costs $850,000 with a down payment of $170,000, you'd need to earn $126,832 per year before tax. The monthly mortgage payment would be $2,959. Salary needed for 850,000 dollar mortgage.
How to afford a 1.5 million dollar home? ›
How much do you need to make to be able to afford a house that costs $1.5 million? To afford a house that costs $1,500,000 with a down payment of $300,000, you'd need to earn $223,820 per year before tax. The monthly mortgage payment would be $5,222.
What is the 10 15 rule mortgage? ›The 10/15 rule is when you apply 1/10th of your monthly mortgage as an additional weekly principal payment. 💰 As an example, this scenario was calculated with a $300,000 mortgage at a 6% interest rate, which will leads to a $3,000 a month mortgage payment and $300/week extra principal payments to hit the 10/15 rule.
How much do you have to make a year to afford a $350 K house? ›You need to make $129,511 a year to afford a 350k mortgage. We base the income you need on a 350k mortgage on a payment that is 24% of your monthly income. In your case, your monthly income should be about $10,793. The monthly payment on a 350k mortgage is $2,590.
How much is a $2 million dollar mortgage monthly payment? ›What Is the Monthly Mortgage Payment for a $2 Million Home? The national average for a 30-year fixed-rate jumbo loan mortgage is around 3.5%. At that rate, the monthly mortgage payment for a $2 million home will be around $7,800 per month, with a 20% down payment.
Can I afford a 2 million dollar home? ›Therefore, if you want to buy a $2 million house, you need to make at least $667,000 a year. You should also have enough for a 20% down payment, or $400,000, plus a $100,000 cash buffer in case you lose your job. In this low interest rate environment, you can stretch to buy a home up to 5X your annual gross income.
How much is a $1 million dollar mortgage monthly payment? ›A 30-year, $1,000,000 mortgage with a 4% interest rate costs about $4,774 per month — and you could end up paying over $700,000 in interest over the life of the loan.
How much house can I afford if I make $75 K? ›Start with the 28/36 rule
If you're making $75,000 each year, your monthly earnings come out to $6,250. To meet the 28 piece of the 28/36 rule, that means your monthly mortgage payment should not exceed $1,750. And for the 36 part, your total monthly debts should not come to more than $2,250.
For many buyers, a good guideline is to look for a home that is about 3 to 5 times your household annual income. If you have no other debt you may be able to look at the top of that range, while if you have significant debt you might consider the lower part of that range.
How much is 70k a year hourly? ›A salary of $70,000 equates to a monthly pay of $5,833, weekly pay of $1,346, and an hourly wage of $33.65.
What mortgage can I afford on 125k salary? ›Following this rule, if you make $125,000 before taxes, you should be able to afford up to $35,000 in housing expenses per year — or about $2,916 per month.
What is 120k a year hourly? ›
$120,000 is $57.69 an hour without vacation time.
If you work a full 40-hour week for 52 weeks, that amounts to 2,080 hours of work. So $120,000 a year in income divided by 2,080 is a $57.69 hourly wage.
In most parts of the country, a $100,000 salary is considered good; maybe even very, very good. It can be more than enough for an individual or even a small family to live comfortably.
How much house can I buy for $4000 a month? ›High Balance Conforming Loans
With 20% down, homes valued from $685,314 to $1,027,969.00 fall into this loan category. The final sales price of a home would need to be no greater than $905,750.00 to achieve that $4,000 a month mortgage.
Start with the 28/36 rule
If you're making $75,000 each year, your monthly earnings come out to $6,250. To meet the 28 piece of the 28/36 rule, that means your monthly mortgage payment should not exceed $1,750. And for the 36 part, your total monthly debts should not come to more than $2,250.
This model states your total monthly debt should be 25% or less of your post-tax income. Let's say you earn $5,000 after taxes. To calculate how much you can afford with the 25% post-tax model, multiply $5,000 by 0.25. Using this model, you can spend up to $1,250 on your monthly mortgage payment.
What is the 28 36 rule? ›The 28/36 rule states that your total housing costs should not exceed 28% of your gross monthly income and your total debt payments should not exceed 36%. Following this rule aims to keep borrowers from overextending themselves for housing and other costs.
How much do I need to make to buy a $1000000 house? ›Experts suggest you might need an annual income between $100,000 to $225,000, depending on your financial profile, in order to afford a $1 million home. Your debt-to-income ratio (DTI), credit score, down payment and interest rate all factor into what you can afford.
How much house can 150k salary afford? ›| Gross Income | 28% of Monthly Gross Income | 36% of Monthly Gross Income |
|---|---|---|
| $60,000 | $1,400 | $1,800 |
| $80,000 | $1,867 | $2,400 |
| $100,000 | $2,333 | $3,000 |
| $150,000 | $3,500 | $4,500 |
Many lenders will be happy to offer you a mortgage if you're over 50, with a standard 25-year term and competitive interest rates often available. In some cases, you may be asked to show evidence of your predicted retirement income.
What is the 3 7 3 rule in mortgage? ›Timing Requirements – The “3/7/3 Rule”
The initial Truth in Lending Statement must be delivered to the consumer within 3 business days of the receipt of the loan application by the lender. The TILA statement is presumed to be delivered to the consumer 3 business days after it is mailed.
Will interest rates go down in 2023? ›
Beyond this year, the group expects mortgage rates to average 4.4% in both 2024 and 2025. Bank of America: Researchers at the investment bank expect mortgage rates to fall to 5.25% by the end of 2023.
How much money do you have to make to afford a $300 000 house? ›How much do I need to make for a $300,000 house? A $300,000 house, with a 5% interest rate for 30 years and $15,000 (5%) down will require an annual income of $77,087. This calculation is for an individual with no expenses. Use the calculator above to determine the income you need to purchase a $300,000 home.
What is the 20 10 Rule of borrowing? ›This means that total household debt (not including house payments) shouldn't exceed 20% of your net household income. (Your net income is how much you actually “bring home” after taxes in your paycheck.) Ideally, monthly payments shouldn't exceed 10% of the NET amount you bring home.
Is 36 a good debt-to-income ratio? ›Debt-to-income ratio of 36% or less
With a DTI ratio of 36% or less, you probably have a healthy amount of income each month to put towards investments or savings. Most lenders will see you as a safe bet to afford monthly payments for a new loan or line of credit.
You could make as little as $100k per year and afford a $1.5 million house if you have enough to put down, or you may need to make more than $350k per year. Assuming the average, most people who qualify for this much of a house make around $200k-$250k plus per year if they have little to put down.