Why should you try to be as accurate as possible? Well, once you figure out this number, you can plan and design around that figure so that even if your budget goes over by some you can still afford to finish your house.

The best way to know how much you can afford is to use the following rule of thumb:

To figure out what you can afford you need to know that the total principle and interest payments on borrowed money should not exceed 25% of your gross annual income. However, this varies some depending on the interest rates, so if this concerns you, or you want the most accurate figure you can get, just ask the lender what they allow.

Since your payment (loan payment only, not including taxes and insurance amounts) should not exceed 25% of your monthly income you need to determine what that number is. This is relatively simple math, just take your income.let's just say $40,000 and divide it by 12, that will be your monthly income. Then you need to take that number and divide it by 4, which will give you 25%. So in this case, the amount you could pay in interest and principle payments each month would be $833.33. Now, you might find that your circumstances allow you to spend more, or less than this, and that is something you need to consider (especially if it is less).

However, from here the amount you can get the bank to finance will depend on the term of the loan and the interest rate.

But you want that amount to be the upper limit you are willing to spend, and plan to spend less so you have room to breathe.

Once you know what you can afford, and what the bank will loan you, you need to translate that into what it means as far as a house goes. Or in other words, how much house can you get for that amount? To do this, you need to find out what it costs to build in your area. The best way to find out local building costs is to ask builders directly what they would sell the homes they are building for. Then deduct 15-25% of that, as that is the builder's profit, and then divide the rest by the number of square feet. This will give you a pretty realistic estimate on the cost per square foot of the type of house you want to build. However, remember that the cost per square foot does not include the cost of the lot. So, make sure you deduct the cost of the lot before calculation. For example, $250k (cost of home) - $75k (cost of lot)= $175k - 20%= $140k / 2200 square feet = approximately $64/sq foot.

To get the most accurate estimate possible, you want to do this with 3 different homes, and then average the three to get a realistic estimate of cost.

Here is the formula you should use:

Comparable Home Value - Lot Value = Building Value

Building Value / Square Footage = Cost Per Square Foot

House 1 cost per sq. ft.
+House 2 cost per sq. ft.
+House 3 cost per sq. ft.
__________/3 = average cost per sq. ft.

My home is ________ sq. ft. x average cost per sq ft. = my approx cost to build my home.

Of course, just because you get a number of say $45 a square foot, does not mean that will be the case for you. Your cost per square foot is in large part going to be determined by the quality of material and the extras that you use.

The best part about this estimated cost is that it will help you figure out about the size of house you can afford, so keep that square footage number in mind as you design the layout, floor plan, etc. of your house. And, it is best to have fewer rather than more square feet than you estimate you can afford. This keeps you on the safe side of not going over budget.

While these are rough figures, you'll be surprised how accurate they are.