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Buying a House? This Is the Single Most Important Number to Focus On

A real estate agent shows a couple with an infant a house.

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When you’re buying a house, there are a lot of numbers you need to know. Obviously, you have to know the price of the home so you can decide if it’s a good value. It’s helpful to know your credit score, since this can help to determine if you can get a mortgage and at what rate. And you want to know your mortgage interest rate, since that affects the cost of borrowing over time.

But while all of those numbers are important to know, there’s an even more critical number that everyone must pay attention to before they move forward with a home purchase.

Do not buy a house without knowing this number

The single most important number that you must consider when buying a house is the ratio of what your housing costs will be relative to your income. This includes the cost of your mortgage loan, homeowners insurance, and other housing-related costs like homeowners association (HOA) fees.

Knowing what your housing costs are as a percentage of income is critical because you do not want to spend more than around 25% to 30% of your monthly income on housing costs. Doing so would leave you continually broke without enough money for other stuff — and also likely continually stressed as a result of coping with having too little money.

Now, banks and mortgage lenders often let you borrow more than this amount. They’ll usually allow you to have debt payments equal to 36% of your income (including housing and other bills you owe) or even up to 43% of your income. But just because you can doesn’t mean you should.

The bank only cares about making as much money as it can — it’s up to you to care about other financial goals besides just buying a house. And if you’ve devoted more than the recommended amount to housing, you could very well be unable to invest for retirement or afford that vacation you want to take.

How much can you really afford?

Keeping your housing payment below 30% of your income is a good rule of thumb, but if you want to be even more certain you can afford your mortgage payments, you should practice making them.

Before you buy, figure out what your home will cost by using a mortgage calculator that takes taxes and insurance costs into account. If that amount is higher than what you’re currently paying for housing, you should test out making that higher payment by putting the difference into a savings account. So, for example, if you’re currently paying $1,800 a month for rent, and your housing costs will go up to $2,100, then pay your rent each month and put the extra $300 into savings.

If you can comfortably do this for several months — ideally around six — then you should be good to go ahead and buy. If not, then you should find ways to cut other living costs, save a larger down payment (so you’ll have a smaller mortgage payment), or buy a cheaper house so your costs won’t be such a burden.

By focusing on your home costs as a percentage of income, you can get a good idea of what is most likely to be affordable for you. This number matters more than anything else, though. It doesn’t matter how good your mortgage rate is or how good of a deal you got on your home if the costs aren’t affordable based on what you earn.

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The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.The Motley Fool has a disclosure policy.

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