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There are actually multiple answers to this question. There is what the bank says you can afford and there is the amount you really should be financing to ensure that you would be able to keep up the payments without fail. Other factors to consider include the amount of other outstanding debts you may have. These include auto payments, student loans, credit cards, etc. There is also the question of what other payments will be associated with the home outside of the mortgage (principle & interest), taxes, and insurance.
Most banks will allow you to finance a monthly payment of up to 36% of your monthly income. For example, if your household monthly income is $6000, you could potentially qualify for a monthly housing payment of up to $2160. Of course, other factors will be considered, such as credit rating, debt to income ratio, and the size of your down payment. The more favorable those numbers (from the bank’s perspective), the more likely they are to finance you.
Although the bank’s projection of what you can afford should be given proper merit, it is also important for you to sit down on your own and decide what you can really afford to spend on a housing payment. In addition, the best place to start for such an analysis is your current financial situation.
Whether you are currently renting or paying a mortgage, look at what your present payments are and compare them to the proposed payment for the home you want to buy. How much (if any) increase is there in the monthly payment? Then look at your other monthly obligations, as well as how much you currently have left over each month to save and/or invest.
If the amount you have left over each month is greater than the projected increase in the monthly housing payment, then you may be able to afford your new home. However, there is more to consider. Will your new home incur any added expenses you do not already have? These may include homeowner association dues, higher energy costs, increased maintenance/repair costs, etc. Make sure you are accounting for these expenses as well.
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