Figuring out how much house you can afford is all about matching your money situation with what lenders look for. Lenders check your steady income, your savings for the down payment and closing costs, your debt, and your history of paying bills on time.
But remember, the amount a lender will let you borrow is not the same as what you can really afford. Lenders decide how much money they feel safe lending based on your finances. For you, true affordability means how comfortable you feel with your monthly payments and other home expenses.
Use a home affordability calculator to work out your numbers, then aim for a lower price than the maximum. This extra cushion helps you live comfortably. With this information, you can choose the right type of mortgage and figure out how much house you can afford.
Using a Home Affordability Calculator
A calculator can help you know your target loan amount. You will need:
- Gross monthly income: Your pay before taxes and deductions.
- Monthly debt: Payments for car loans, student loans, credit cards, etc.
- Down payment: Money you have saved.
- Loan term: For example, a 15-year or 30-year mortgage.
- Interest rate: The rate you might get.
- Credit score: Your financial trust score.
Example Calculation:
- Gross annual income: $70,000 (about $5,800 per month)
- Monthly debt: $250
- Down payment: $20,000
- Loan term: 30 years
- Interest rate: 6.5%
When you add payments for private mortgage insurance (PMI), homeowners insurance, and property taxes, you might qualify for a mortgage up to about $213,808 with a monthly payment of around $2,100. If you buy a home with homeowners association dues, you will pay a bit more every month.
How to Know What Price House You Can Afford
When you decide on a house, ask yourself two questions:
- Up-Front Costs: How much can you pay for the down payment and closing costs?
- Long-Term Costs: How much can you handle each month for mortgage payments and extra expenses?
Down Payment
Your down payment is the cash you pay when buying the home. For a $400,000 home with a $20,000 down payment, you will borrow the rest ($380,000).
Minimum Down Payments for Common Loans:
- Conventional Loan: 3%
- Jumbo Loan: Usually 10% to 20%
- FHA Loan: 3.5%
- VA Loan: 0%
- USDA Loan: 0%
If you don’t have the minimum (like 3% of $400,000, which is $12,000), you might need to buy a cheaper home or save more money.
Closing Costs
Closing costs are extra fees when you buy a house. They usually cost 2% to 5% of your loan amount. For a $400,000 home, you might need:
- $12,000 for the down payment.
- 2% to 5% of the $388,000 you borrow (about $7,760 to $19,400).
So, you need about $19,760 to $31,400 on closing day. These costs cover things like a home appraisal, inspection, title fees, and credit checks.
Cash Reserves
It is smart not to use all your money on the down payment and closing costs. Keep three to six months of living expenses as an emergency fund. Also, save extra for home repairs or furniture to make your new house feel like home.
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Monthly Mortgage Payments
Once you own the home, make sure your monthly mortgage payment is something you can comfortably pay. Use our monthly mortgage payment calculator to help figure out a safe amount. High payments can hurt your quality of life and even risk foreclosure.
Your Debt-to-Income Ratio (DTI) and the 28/36 Rule
Lenders look at your debt-to-income ratio, which is how much debt you have compared to your income. To calculate your DTI:
- Find your monthly gross income (before taxes).
- Add up all your monthly debt payments (credit cards, loans, etc.) including your estimated mortgage.
- Divide your total debt by your income.
Example:
- Monthly debt (including mortgage): $2,000
- Gross monthly income: $5,000
- DTI: $2,000 / $5,000 = 0.40 (or 40%)
The 28/36 Rule:
- Front-End Ratio (28%): Your housing expenses (mortgage, taxes, insurance) should be no more than 28% of your income.
- Back-End Ratio (36%): All your debt payments should not be more than 36% of your income.
Some lenders might allow a back-end ratio as high as 40% for well-qualified buyers, but a higher ratio might mean a higher interest rate.
How Much House Can You Afford With Different Loans?
- Conventional Loan:
Many lenders let you get a conventional loan with just 3% down. They prefer a DTI of 41% or less, but sometimes up to 50% if you qualify. A 20% down payment avoids paying PMI. - FHA Loan:
You can get an FHA loan with 3.5% down if your credit score is at least 580. The DTI should be 43% or less. Remember, you will also pay mortgage insurance premiums (MIPs) with an FHA loan. - VA Loan:
VA loans from the U.S. Department of Veterans Affairs usually do not need a down payment. Lenders like a DTI of 50% or less. A 0% down payment makes it easier at first, but monthly payments may be higher. - USDA Loan:
USDA loans, like VA loans, usually require no down payment. Lenders prefer a DTI of 41% or less. The same idea applies—a 0% down payment may mean higher monthly costs.
Determining True Home Affordability
Remember, you are buying a home to live in, not just to get a loan. Lenders sell you a mortgage, but only you know what monthly costs you can handle. Even if a lender approves you for a large loan, it might be best to choose a house with lower payments so you can still enjoy life. Being in control means choosing a home that fits your budget and keeps your life comfortable.
FAQs About Home Affordability
How Can I Increase My Buying Power?
Save up for a bigger down payment and work on improving your credit. This will help lower your interest rate.
What Costs Should I Consider?
Look at the mortgage payment, insurance, taxes, HOA fees, and if you need to pay for private mortgage insurance (PMI) when your down payment is less than 20%.
When Am I Ready to Apply for a Mortgage?
You are ready when you have a steady income, control your monthly expenses, have a good credit score, and have saved enough for a down payment and closing costs.
How Does Debt Impact My Affordability?
Your debt affects your debt-to-income ratio. The higher your debt, the less house you can afford. Use a home affordability calculator to see how your debt measures up.