Buying a property is a major investment, but many people tend to get lost between their dreams and reality. You may dream of owning a spacious four-bedroom home, but aren't sure how much property your finances can support. The truth is that how much home you can afford depends not only on your income, but is also affected by debt, mortgage rates and other costs. Here, we'll break down how to calculate how much mortgage you can afford and how to find the ideal home for your budget.

1. Estimating affordable home prices

Generally speaking, you can buy a home worth two to three times your annual income. For example, someone earning $100,000 a year can afford a property worth $300,000 dollars. However, this is only a preliminary estimate and other factors need to be considered in reality.

2. Income versus debt

Mortgage affordability depends not only on income, but is also closely related to debt. Even with higher incomes, too much debt (e.g., credit cards or student loans) can reduce the amount available for mortgage payments.

The 28/36 rule is a commonly used measure:

28%: monthly housing payments (including mortgage, insurance, and taxes) should not exceed 28% of income.

36%: total debt to income should be no more than 36%.

For example, a person earning $6,000 per month with a monthly mortgage payment of $1,680 plus $500 in debt service would have a debt-to-income ratio of 36%, which is the maximum acceptable value.

3. Other costs

In addition to the down payment and monthly mortgage payment, there are settlement costs (usually 2%-7% of the home price) and property taxes to consider when purchasing a home. Closing costs are a one-time payment, while property taxes are usually included in the monthly payment, but the amount varies by location.

4. Summarize

By setting an affordable monthly repayment amount and calculating other related costs, you can clarify your home buying budget. If the budget is not enough to purchase your ideal home, you may need to adjust your needs and consider more compromises.

Knowing your home buying budget will not only help you avoid overspending, it will also ensure you stay financially healthy during the repayment process. By accurately calculating the amount of mortgage you can afford, taking into account debt and additional costs, you can enter the market with more confidence. If your budget isn't enough to buy your ideal property, compromising and adjusting your goals at the right time will help you make informed home buying decisions and ensure that the future isn't plagued by financial stress.