This number is the most important detail in your home-buying journey. Find out why (and how to calculate yours).
Purchase power is the sweet spot of exactly how much house you can responsibly afford – taking into consideration your income and each of your monthly expenses, including utilities, taxes, insurance and other regular bills. Working with your loan officer, you can figure out monthly payments that match your financial situation — and your goals — without setting you up to struggle in the long-run.
Knowing your purchase power sharpens your house-hunting criteria and lets you focus on homes you can actually afford. It also gives you a sense of how much you'll want to get prequalified for. Your calculation takes into consideration these factors:
- Household income: salary, income from investments and other money you earn (or receive) on a regular basis.
- Available money: funds for down payment, closing costs and earnest money. You'll want these funds to be accessible — either in savings or investments.
- Monthly bills: the regular kind, like student loan debt, car payments and credit card bills.
- Living expenses: these expenses are regular, but may vary. Think groceries, utilities, childcare, medical and auto insurance.
- Credit profile: the better your credit, chances are, the better your interest rate.
How to calculate Purchase Power.
It starts with the 28/36 rule. Simply put: your housing expenses should amount to no more than 28% of your gross monthly income -and- your total monthly debts (add in car payments, credit cards, student loans, etc.) shouldn't be more than 36%. Here's the math: Add up your currently monthly expenses (minus housing, for now) and divide by your gross monthly income, then multiply by 100 to get the percentage. Subtract that percentage from 36% to see what proportion of your gross monthly income you can allocate to housing.
Now that you've learned the math behind it, here are two easier ways to calculate your Purchase Power — and experiment with different scenarios. Check out the NerdWallet Affordability Calculator, which not only lets you test scenarios, but breaks down expenses and gets nitty-gritty on the math.
You should also schedule a quick call with your loan officer, who can walk you through your purchase power calculation, help you understand your options and get a real-time rate for your mortgage. S/he can even get you prequalified. Provide a few details and your loan officer will walk you through the rest.