When it comes to shopping for small things, like a new pair of boots or a nice dinner out, we tend to rely on our gut to judge how much we can afford. $600 for a pair of boots just feels wrong. But when it comes to buying a house, the biggest purchase you’ll likely ever make, a little more thought is in order.

It’s by no means a rarity to struggle to make your mortgage payments. While the number of distressed mortgages continues to fall after they hit a peak during the mortgage crisis, there were still And 5.7% of home borrowers were at least one payment behind on their mortgages last year. That’s more than one out of twenty home owners. Maybe you know someone who is secretly struggling.

Lenders have tightened their standards since the mortgage crisis, but that doesn’t mean you should just let the banks to the math for you.  Take these steps, and you can be confident going in that you have a handle on how much house you can buy, without going broke.

Look at the Mortgage-to-Salary Ratio

A generally accepted rule of thumb is that your mortgage shouldn’t be more than three times your annual income. So if you make $165,000 in household income, a $500,000 house is the very most you should get. (Some people recommend that it shouldn’t be more than 2.5 times your annual income, which yields a house price of about $412,000.)

Of course, there is some nuance in here. If your income varies, you or your spouse might leave work to raise a child, or you would have trouble finding another job with the same income level if you lost yours, then you might want to get a mortgage on the smaller side. Ditto if you have other large obligations, such as private school, student loan payments, helping support your parents, or costs stemming from a chronic health issue.

Look at the Payment-to-Paycheck Ratio

Another way to look at it is to make sure your monthly payments don’t exceed 28% of your monthly gross income, before taxes and other deductions are taken. (That’s a similar rule to renting, in fact.) In the example we used above, for a dual income of $165,000, that comes out to payments of $3,850 a month at the very most.

You can actually figure out what kind of house that payment correlates to by playing with this mortgage calculator. Note that all the numbers interplay with each other. The shorter the mortgage in terms of years, the higher the monthly payments will be, but also the lower the interest rate.

Most home buyers choose a 30-year mortgage because the payments are spread out over more time, so they are lower. And it also seems like a more stable situation to many people. You could stretch your budget to a bigger house by paying it off more slowly.

On the other hand, financially, it might be better to get a shorter mortgage, because the interest rate will be lower, saving you money. A lot of money. Let’s say you want to get a $500,000 house, and you get a 30-year loan with a 4.09% APR  (the average at the time of this writing). Your monthly payment will be $2,400 – totally feasible! But! You’ll pay $368,000 in interest over the life of the loan. If you decide to get a 15-year loan with an interest rate of 3.27%, you’ll pay just $133,000 in interest over the life of the loan. That saved you $235,000! Hello, college tuition. Of course, the payment for the latter option jumps up to $3,500 a month, which is getting close to your limit, and doesn’t leave you much breathing room in case one of you is no longer working. So to get a shorter mortgage and stay safe, you might have to scale down your ambitions a bit to a more humble abode.

Check You Credit Score

Those above numbers were assuming you have an excellent credit score. Do you know your credit score? You should check on it several months before you want to buy, because it affects the interest rate on your mortgage and how much mortgage you’ll be approved for. Credit Karma lets you check and monitor your credit score for free.

A low credit score could be a reflection of bad debt management on your part … or it could be a mistake! If it seems low, pull a credit report – you can pull one for free from each of the large credit rating agencies once a year – and check for errors, which you can dispute. Also check for accounts that you thought were closed or paid, so you can take care of them. Do so at the government-approved annualcreditreport.com.

Get Solid on Your Down Payment

Oh wait, there’s more. All the calculations above were also based on the assumption you would put 20% down on the home. If you want a $500,000 home, that is $100,000 you need in savings.

Could you pay less? Yes, but it wouldn’t be a great move. It could increase your interest rate, which, as we already discussed, means a lot of money wasted in the long run. You would also have to get private mortgage insurance, which is an additional $50 to $100 tacked onto your monthly payment. That private mortgage insurance is a reflection of the fact that a lower down payment is riskier for you and the lender.

In fact, you should probably have more than 20% of the down payment in the bank, because having emergency savings is essential to home ownership. You might have to deal with things like a leaky roof, broken pipe, pests, or an old water heater or air conditioner that need replacing. At the very least, you’ll need to get a few new pieces of furniture, and might want to repaint some of the rooms, or tear out that old carpet. Moving into a new home and sleeping on the floor next to paint peeling off the wall is what some call “house poor.” We don’t recommend it.

So, if you don’t have the full down payment for the house you want, your two best options are: 1. Keep saving, or 2. Buy a less expensive home.

Do a Practice Run

It’s so much fun to play with numbers, but you never know until you try. So before you sign on the dotted line, give it a test run. You can get pre-approved for a mortgage from a lender to verify what kind of interest rate you qualify for. Then, you can go house hunting.

As you look at properties, keep an eye out for additional costs, like maintenance, homeowners association (HOA) fees, parking, property taxes, home insurance, utilities, and the kind of upkeep expenses you wouldn’t have thought of when you were renting (gutter cleaning! Landscaping!). All those together represent the true monthly cost of owning a home, and can be several hundred more than the monthly mortgage. If that comes to more than your current rent, see what happens when you set aside that amount from your paycheck every month (preferably into your down-payment savings account). Is it feasible? What would you have to give up?

This test run also gives you the benefit of thinking about the biggest purchase you’ll ever make for a few months, instead of rushing into it. And that is always a great idea.

Got More Questions?

We just threw a lot at you. And if you would like someone to guide you through this process so you feel completely confident, a financial planner can help you avoid pitfalls, or calculate how student loan payments or other financial obligations will impact the type of house you can afford. Find a financial planner who is experienced in the area of home buying on GuideVine.


Alden Wicker

Alden Wicker

Alden Wicker is a freelance journalist specializing in personal finance and sustainable lifestyle topics. She lives in New York, and is an expert at finding new and interesting ways of generating extra income. Her biggest budget weakness is eco-friendly fashion. Follow Alden on Twitter and Google+