If you're like most people, you think that banks don't give out mortgages borrowers can't easily reap. Though what you think makes sense, it's not how it actually works. Yes, banks look out for themselves but it's a bit more complicated than that. But that's not what I'm writing about. What I'm writing about is: How do you know how much home you can afford?

So how do you know what's the most you can pay for a house?

Home Loans

It's simple, actually. You need to know how much mortgage you can afford. What you can comfortably afford and what your mortgage broker qualifies you for are not always the same. Add that to the total house expenses, making sure you don't leave anything out. That means a lot for all the bills and for reserves. Also think ahead. What are you likely to need or want in 2, 5, 10 years? Will you become a parent? Will your daughter be starting college but only if you pay for tuition?

1. You can start with the rule of thumb that says you can afford to pay 3 times more than what you gross in a year for your home. If your gross earnings are 0,000, by this rule you can afford to pay up to 0,000 for your home. The rule doesn't take into account down payment amounts or mortgage rates, specifically, the mortgage rate you're likely to get. A 0,000 mortgage has a monthly payment of ,073.64 (,883.68 yearly) but ,432.82 (,193.84 yearly). That's a significant difference.

2. You're better off considering your house payments as a percentage of your gross income. Lenders like to see that your house payments are less than 28% of your gross income and your total debts less than 41%.

3. To make things better yet, consider that taking 20% out of ,000 leaves only ,000 for your other expenses while 50% out of 0,000 leaves 0,000. In other words, just make sure you're left with enough for your other expenses, no matter what lenders allow you to borrow.

4. If you've been paying rent or have a mortgage now, a good way to do things is to look at what happened last month and how you felt about it. If you're a renter, don't forget to include the tax benefits (you don't pay taxes on the interest portion of your monthly payments and you can depreciate your home). Consult with your accountant to figure out if you yourself can do that. Generally speaking, if you get the deduction and depreciation, you can spend about 33% more on house payments (mortgage, property taxes, property insurance) than you did on your rent and end up in the same place financially.

If your current rent or house expenses leave you stressed, you obviously should be aiming for something lower.

Here are the 4 ways of looking at it. You don't have to use only one. Whatever you choose to do, don't let emotions get in the way of math. Buying a home is all about math. Yes, it's great if you also love your new home. But you're not going to love it for a long time if the bank takes it back.