How Much House Can I Afford to Buy?

Q: I’m 21 and thinking about buying my first home. How much house can I afford to buy, and is it OK to bid less than what the seller is asking?

A: You have actually asked two of the more difficult questions to answer when it comes to real estate.

Many people believe there are strict formulas that determine how much they can borrow for a home. In reality, lenders have loosened their standards considerably in recent years, and some borrowers may find — much to their later sorrow — that they can get a much bigger mortgage than they can comfortably repay.

A good rule of thumb is to keep your total housing costs — including mortgage, taxes and insurance — to about 25% of your gross income. That way, you’ll have enough money for other goals, such as retirement savings and vacations.

You can stretch a bit more if you expect your income to rise considerably within a few years or if you have no other debt. But you might want to be even more conservative if your income is uncertain or your debt load is particularly heavy.

Once you have a target monthly payment, you can play with the online mortgage affordability calculators offered by companies including Bankrate Inc. and E-Loan Inc. to see how much house that will buy.

As far as how much to bid, you might consider consulting an experienced real estate or buyer’s agent who is well-versed in the neighborhoods you’re targeting for your house hunt.

There are no hard-and-fast rules. Some sellers overprice their homes; others set the price too low, hoping to set off bidding wars. A smart agent can help you figure out which is which and coach you on the best bidding strategies for your market.