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How Much House Can I Afford?

tl;dr

What You Need To Know

  • Mortgage advisors may recommend the 28/36 rule: Don’t spend more than 36% of your income on debt and 28% of your income on a mortgage
  • Mortgage lenders prefer that borrowers have higher credit scores for better rates, but they may accept scores as low as a median 580 FICO®
  • Your debt-to-income ratio (DTI) determines how much house you can buy and how much someone will lend to you

Contents

Are you asking yourself, “How much house can I afford?” The answer will depend on your current debt-to-income ratio (DTI), down payment and other factors.

Choosing a home is only one part of the homeownership journey. You also need to be sure that you can afford the monthly mortgage when it comes knocking on your front door. Sticking to the 28/36 rule saves you money and makes sure you can afford the purchase.

Buy a home that gives you a low monthly mortgage payment. You can use the money you save on other activities – not to mention save yourself from having to sell your coveted sneaker collection to make ends meet.

What House Can I Afford? Let’s Calculate Down Payment, Monthly Debt and All That Jazz

To determine how much home you can afford, it’s important to look at several financial factors, including:

  • Monthly expenses
  • Your current monthly budget
  • Your cash reserves for home buying costs and fees, such as your down payment, property taxes, homeowners insurance and more
  • Your DTI should, ideally, be below 43%. That’s all your monthly debt payments divided by your monthly gross income (if you have $2,000 in debt and you have a gross monthly income of $5,000, your DTI ratio is 40% [ $2,000/$5,000 = 0.40, and 0.40 x 100 = 40])

Next, look at your monthly income and expenses to decide what kind of mortgage is right for you.

What Exact Mortgage Can I Afford?: Be Real

When you think about how much mortgage you can afford, you need to be truthful and realistic about your monthly expenses, including your monthly debt payments.

In practice, it’s better to overestimate your expenses. You don’t want to find yourself caught out there during an emergency or because of an unexpected expense. Write out your budget and round up to the nearest whole number. Is your electric bill $51 on average? Round it up to $60. This kind of budgeting gives you more wiggle room.

The most precise forecasting tool you can use is the 28/36 rule. It’s a simple calculation that helps you determine what you can afford to pay.

According to the rule, you should spend approximately 28% of your gross monthly income on your housing expenses and no more than 36% (in total) on all your other debts – like car loans, credit cards, student loan payments and other bills and expenses.

For example, if your monthly pre-tax income is $3,000, 28% of your income would be $840. That’s the total mortgage amount – including your taxes, homeowners insurance, escrow and mortgage insurance – you should be aiming for. If you have no other debts, you could go as high as a $1,080 mortgage payment which would be 36% of your take-home income.

Although this is in a good general rule, mortgage lenders have their own DTI requirements. For the best chance of approval, it’s often a good idea to keep your DTI under 43%. Find the best mortgage for you by shopping around and keeping those three key tips in mind. 

Knowing How Much Home You Can Afford at the Best Interest Rate: Your Credit Score Glow Up

Mortgage lenders give the lowest mortgage interest rates to people with the highest credit scores, the most money available for a down payment and the lowest debt-to-income ratio.

Keep in mind that the better your credit score is, the better the mortgage rate offers will be. Most lenders require borrowers to have a credit score of 580 or higher. Higher credit scores lead to lower interest rates, and lower interest rates lead to lower monthly payments.

Making a larger down payment looks good to lenders because they can see that you’re serious about your purchase. They’ll also see you as a lower-risk buyer. Your loan-to-value ratio (LTV) may increase because the lender will gravitate to loaning to someone who has more money for a down payment.

How Much Should I Spend on a Home?: It’s Up to You

How much you spend on a home should be about your preferences and your budget – and not about keeping up with anyone (Kardashians or otherwise). Everyone needs to look at their own financial situation before deciding what kind of mortgage payment is right for them.

The best amount will be what you can afford to pay and comfortably manage. Your mortgage should be low enough that you can still enjoy going on vacations, ordering in a few nights a week or taking the occasional salsa dance class.

The Bottom Line: Honesty Is the Best Policy

The answer to how much house you can afford is … drumroll … It depends. Be honest with yourself about your budget and financial constraints. You want to know how much house you can really afford so you don’t get in over your head. The mortgage that’s right for you is the mortgage that shouldn’t be hard for you to maintain.

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In Case You Missed It

Take-aways

  1. Remember: You shouldn’t spend more on a home than you can afford
  2. Plan for unexpected expenses when purchasing a home. Try and avoid buying a home that’s so expensive that you can’t do the things you love anymore
  3. The right mortgage for you should be manageable on your income

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