Know how much you can afford to borrow

Hundred dollar bills in shape of house

Knowing exactly how much you can afford to borrow is critical.

Without a reasonable limit, your mortgage payments could be so high that you're scraping and scrimping to pay your other bills every month.

The best way to keep from being house poor is to follow two simple rules:

Housing costs -- including principal, interest, taxes, assessments and any other fees -- shouldn't exceed 28% of your gross or pretax income.

Debt payments -- including mortgage, auto loans, student loans, child support and credit card bills that will take more than six months to pay off -- shouldn't exceed 36% of your pretax income.

Our mortgage calculator applies those rules to your monthly income and expenses to determine the absolute most you should borrow.

The interest rate you'll pay for your loan is also part of that calculation. Our extensive database of mortgage rates will provide a good idea of how much lenders are charging in your area.

Add whatever you've set aside for a down payment to the amount you can reasonably afford to borrow, and you've got the maximum price you should pay for a home.

Click here to find all of our most recent advice on how much you can afford to borrow.

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