Money

Here's how to figure out how much home you can afford

Three-decker houses in Dorchester, MA.
Steve Dunwell | Getty Images
Three-decker houses in Dorchester, MA.

According to self-made millionaire and financial adviser David Bach, buying a home is "an escalator to wealth."

Bach says the smartest investments he ever made were all in real estate. He tells CNBC: "I first bought a home in San Francisco. It skyrocketed in price. I moved to New York and bought another home. It skyrocketed in price. My net worth has gone up millions and millions of dollars, simply because I've lived."

Self-made millionaire and bestselling author David Bach
Courtesy of David Bach
Self-made millionaire and bestselling author David Bach

Buying a home may be the biggest purchase you ever make, and you want to be sure the one you choose is one you can afford.

First and foremost, Bach recommends having a down payment of at least 10%, though more is always better. Ideally, you'll want to put 20% down. Anything lower and you will have to pay for private mortgage insurance.

As for monthly payments, "according to the Federal Housing Association, a good rule of thumb is that most people can afford to spend 29 percent of their gross income on housing expenses — as much as 41 percent if they have no debt," Bach explains in his book, "The Automatic Millionaire."

Of course, you'll want to take into account more than just the sticker price. Home-ownership costs include mortgage interest, taxes, insurance, maintenance, and any renovations you might want to make.

To make sure you're not buying more home than you can afford, check out Bach's chart that shows the range of what you can afford depending on your salary and according to the FHA's rule of thumb.

Note that these numbers can be applied to rent. So if you earn $70,000 a year, you should be able to spend at least $1,692 a month and up to $2,391 a month — in the form of either rent or mortgage payments.