Updated for 2013. By definition, a “rule of thumb” is meant to be a greatly simplified estimate for a complicated matter. Mortgage lenders use income size, income stability, credit score, downpayment size, and other factors before approving a loan. But the most common way to express affordability is as a multiple of your household or individual annual income. CNN Money says 2.5 times:
The rule of thumb here is to aim for a home that costs about two-and-a-half times your gross annual salary.
The now-defunct Washington Mutual Bank suggested up to 4-5 times:
As a broad generalization, most people can afford to purchase a house worth about three times their total (gross) annual income, assuming a 20% down payment and a moderate amount of other long-term debts, such as car or student loan payments. With no other debts, you can probably afford a house worth up to four or even five times your annual income.
Running Your Own Numbers
I decided to run some numbers for myself using values I think are reasonable along with current interest rates. The Federal Housing Administration provides the following guidelines for the loans that they accept: