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You’ve probably asked yourself a very common question at the start of your home buying journey: How much house can I afford?
Knowing how much house you can afford will help you create a realistic budget and find your dream home in your dream price range. Luckily, we can do the math for you.
Use our mortgage calculator to get an idea of how much house you can afford. Stick around and we’ll help you create a budget that supports your homeownership goals and introduce you to the 28/36 rule, a popular budgeting guideline.
Calculate Your Monthly Mortgage Payment
To calculate your estimated monthly mortgage, you’ll need to enter several variables, including the home’s price, your estimated down payment and the loan’s term.
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How Much Mortgage Can I Afford?
To get a better idea of how the estimate is calculated, you should know which factors lenders will likely analyze to figure out how much house you can afford, including:
- Annual income: Your income is a crucial factor lenders will look at because the more you earn, the more you can afford. It is also a key part of the calculation to determine your debt-to-income (DTI) ratio.
- Monthly expenses: If you have lots of other monthly expenses, buying a more expensive house will be difficult and may overload your budget. Credit card debt, student loan debt, car payments and other assorted bills can make comfortably meeting your monthly mortgage payments a challenge.
- Cash supply: The more cash you can put toward your down payment, the less money you’ll borrow, and the lower your monthly mortgage payments will be. You should also consider your closing costs. If you can’t cover the costs at closing and roll them into the mortgage, that will also impact your monthly mortgage payment.
- Credit profile: Lenders may be willing to offer you a lower mortgage interest rate if your credit report shows you have an established history of paying back your debts on time. A lower credit score can lead lenders to charge a higher interest rate, which will result in a higher monthly payment.
Why debt-to-income ratio is important
There are several things that lenders will consider when underwriting a mortgage. One of the most important will be your debt-to-income (DTI) ratio.
Your DTI ratio measures how much money you bring in every month (aka your gross monthly income) against how much money you spend every month on fixed, recurring bills (think: a car note, credit cards, a personal loan, etc.).
Let’s say you make $5,000 a month, and your bills add up to $1,500 a month. To calculate your DTI, you divide your bills by your income. In this case, your DTI would be 30% ($1,500 / $5,000 = 0.3, or 30% (0.3 X 100).
Your DTI ratio is an important percentage that signals to lenders whether you can realistically afford a home. If your DTI ratio is 36% or less, your chances of qualifying for a mortgage will be pretty good. If it’s higher than 36%, you may qualify for a mortgage, but you may face higher interest rates and fees.
If you don’t know what your DTI ratio is, feel free to use our debt-to-income calculator to find out.
Understand the 28/36 rule
Another useful rule of thumb to help determine how much house you can afford is the 28/36 rule. According to the rule, no more than 28% of your pretax income should be applied toward mortgage payments and no more than 36% of your pretax income should be used for all your debts, including your mortgage payment.
If your monthly pretax income is $5,000 (that’s about $60,000 a year), you can spend up to $1,400 a month on your mortgage ($5,000 X 28%). And you can spend up to $1,800 ($5,000 X 36%) on all sources of debt, including your mortgage.
The Type of Loan You Choose Matters
Spoiler alert: Not all loans are created equal. The type of loan you apply for could affect several variables, including your down payment, monthly interest rates and other important factors that affect affordability.
A conventional loan is the most popular type of home loan in the U.S. The loans are issued by private lenders, including banks, credit unions, mortgage companies, etc. Because the loans aren’t guaranteed by the federal government, they have stricter eligibility requirements. With a credit score of 620 or higher, you can likely qualify to make a 3% down payment.
FHA loans are backed by the Federal Housing Authority. The primary mission of the FHA is to make homeownership more accessible to the American public. With an FHA loan, you can make a 3.5% down payment with a minimum 580 credit score.
The Department of Veterans Affairs (VA) offers a variety of different loan options to qualified service members, veterans and surviving spouses. VA loans have helped millions of eligible borrowers become homeowners.
VA loans don’t require down payments. But if you do make a down payment on the loan, it will shrink the size of the loan and reduce your monthly mortgage payments.
How Much House Can I Afford With My Salary?
One of the best ways to determine how much house you can afford is by using a mortgage calculator, which can help you estimate monthly mortgage costs based on factors such as purchase price, down payment, mortgage term, and interest rate.
Another useful rule of thumb to determine your spending power is the 4-to-1 rule, which says you should only buy a home that’s no more than four times your annual income. If you make $30,000 a year, according to the rule, you should be able to afford a $120,000 home. Do you make $100,000 a year? Then you should be able to afford a $400,000 home. Of course, there are many other variables you’ll need to keep in mind before you decide on the size of your down payment.
Other Home Affordability Factors To Consider
To be clear, the number you see on a mortgage calculator – any mortgage calculator – is an estimate. But this doesn’t make your estimate any less valuable. It’s a solid foundation to start building out the final cost of homeownership.
Like loans, not all mortgage calculators are created equal. If you’re not using our mortgage calculator, make sure the one you’re using includes additional expenses that can cause your monthly housing expenses to increase, such as property taxes, homeownership association (HOA) fees, private mortgage insurance (PMI) and more.
Set Your Budget, Find Your House
So how much home can you afford? In the end, it will depend on a ton of variables, but you shouldn’t begin the home buying process without a number in mind. Use our mortgage calculator, DTI calculator and tried-and-true rules of thumb to create a realistic household budget. Before you start searching for your dream home and a mortgage lender, set a budget that will pave an affordable path for your home buying journey.
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The Short Version
- To calculate your estimated monthly mortgage, you’ll need to enter several variables, including the home’s price, your estimated down payment and the loan’s term
- There are several variables lenders will consider when they’re reviewing your mortgage application. Your debt-to-income (DTI) ratio will be one of the most important ones
- The type of loan you apply for could affect several variables, including your down payment, monthly interest rates and other important factors that affect affordability