One by one, friends and acquaintances are passing through the mysterious and alluring gateway of homeownership. You find yourself wondering how they scraped together the seemingly astronomical amount of cash needed to achieve this life milestone. Are they all secret millionaires? Are they in debt up to their eyeballs? Chances are, the answer to both of those questions is no, but all of those newly-minted homeowners did have to figure out how much house they could afford before signing on the dotted line. Now, it’s also time for you to ask that all-important question: “How much house can I afford?” 

Finagling the Fancy Financial Footwork

Thanks to the handy tools available on the Internet, determining your ideal homebuying budget doesn’t have to be the headache it once was. Online mortgage affordability calculators will plug and chug your finances, then spit out the estimated ideal maximum price of your future dream house. What the calculator can’t do is define the components of affordability in get-real language, or explain to you why it’s so important to take these numbers seriously. That’s why we’re here.

Armed with your mortgage affordability calculator, answer these four simple questions:

  • What’s your income?  

Your recurring income, which probably comes primarily from your salaried employment—but but may also come from investments or yearly bonuses—determines the starting point for your monthly mortgage payment. The amount of debt that you’ll hold, both for your mortgage and for any other debts that you may have, will be compared to this recurring income by lenders. Most lenders recommend that your housing payments (including principal, interest, taxes and insurance) take up no more than 28 percent of your gross income, while total debts for a conforming mortgage can take up no more than 43 percent of your gross income.

  • How much cash do you currently have available?

Your liquid assets (fancy terminology for your available cash from savings, investments, or the like) will be used for your down payment and closing costs (typically 3% of the home price). Most homebuyers abide by the generations-old rule of 10-20% down. If you don’t have that kind of cash, there are still options to explore that don’t require a huge chunk of change upfront.

  • What will your expenses be once you’ve made the move?

Notice we didn’t ask what your current expenses are, we asked what you expect your expenses to be while you’re living in your new house. This is important because you don’t want to get into a situation where your monthly mortgage is suddenly unrealistic or uncomfortable amidst your growing expenses (i.e. having children, going back to school, etc.). When you estimate this part of the equation, allow room for your expenses to grow.

  • How good is your credit?

When it comes to credit, the higher the better. This isn’t news to anyone who owns a car or a television (those “free credit report” jingles sure are catchy). If you have an excellent credit score, your lending institution will offer more money at a lower interest rate. Keep in mind that you should never blindly accept what your lender will offer, as it could be more than what you should really be paying (hello, housing crisis). Work out a number that fits comfortably into your lift.

The Magic “How Much House Can I Afford?” Number

If you’ve been honest with yourself and your new friend the home buying affordability calculator, you now have a shopping budget. If it’s not quite what you thought it would be, and a McMansion is not in your immediate future, don’t freak out. Instead, take comfort—by choosing a home you can truly afford, you’re making the smart decision to prioritize your future financial stability over killer crown molding.