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If you’re looking to purchase a house, how much house can you afford? Find out with this easy-to-use Home Affordability Calculator.
How Much Mortgage Payment Can I Afford?
When calculating how much house you can afford, it’s all about how big a mortgage payment you can manage each month. While there are many factors to consider, the basic calculation is simple.
Your monthly mortgage payment should be no more than 28% of your monthly pre-tax income and, along with your other monthly debt payments, no more than 36% of your total debt. This formula is called the 28/36 rule.
If you and your spouse have a combined monthly pre-tax income of $7000, then when calculating the so-called front-end ratio, your monthly mortgage payment should be no more than 28% of $7000, or $1960.
As noted, you also have to compare the amount of your total debt, including the new mortgage payment, to your pre-tax income. This is called the back-end ratio or the debt-to-income ratio.
Make sure you include monthly credit card payments, auto loan or lease payments, student loan payments, and other monthly obligations.
For example, if you have a $7000 monthly income, the 28/36 rule says that your future monthly debt payments can’t exceed 36% or $2520/month.
If you already have monthly debt obligations that total $600/month, subtract $600 from $2520, and you see that the highest mortgage payment you can afford is $1920/month.
Factors That Impact Affordability
Many factors affect how much house you can afford. These factors work with the 28/36 ratio to help you fine-tune your target monthly mortgage payment.
Here are the factors that impact the overall affordability of a home:
Debt-to-income ratio: The ratio of your expected monthly debt payments should not exceed 36% of your combined pre-tax monthly income. The more debts you currently have, the less you have left over for monthly mortgage payments.
Debt and expenses: The amount of debt you carry and your average monthly expenses affect how much money you have available for your monthly mortgage payment. The higher your debt and expenses, the less you can pay for your mortgage — and the less house you can afford.
Mortgage rate: The percent interest you pay on your mortgage impacts how large a mortgage you can afford. When your mortgage has a higher interest rate, your monthly payment goes more towards paying interest and less towards paying down the principal borrowed.
In other words, a higher interest rate translates into a larger monthly payment. Or, to hit a target monthly payment, a higher interest rate means you need to purchase a lower-priced property.
Credit score: Your credit score affects how big a loan for which you can qualify. If you have a poor credit score, you’ll likely be unable to purchase higher-priced properties. In addition, your credit score affects the interest rate you pay. The lower your credit score, the higher the interest you’ll be charged by a lending institution.
Down payment: You don’t finance the entire purchase price of a house or townhome. You put some money down in advance and only finance the balance between the total purchase price and the down payment.
The bigger your down payment, the less you have to finance — and the less you finance, the lower your monthly payments.
Cash reserves: If you have a lot of cash on hand, you can afford a larger down payment, reducing your monthly payments. If your cash reserves are low, you can put down less, which increases your monthly payments.
Type of loan: There are several different types of home loans and they differ in some important details. A conventional loan tends to have lower borrowing costs but higher interest rates than other types of loans, requires you to put down as little as 3%, and sets a maximum DTI ratio of no more than 43%.
A jumbo loan lets you borrow more money (for a more expensive home) than a conventional loan but requires a down payment of 10% to 20% and a credit score of 700 or more. A government-insured loan, backed by the FHA, VA, or other government entity, doesn’t require a large down payment and may be an option if you don’t qualify for a conventional loan.
Location: Where you live affects how much house you can afford. In some Midwest cities, $400,000 will buy you a very large house on a spacious lot, while that same money won’t be near enough to purchase a tiny studio apartment in a major city.
Property taxes: You have to pay yearly property taxes on any home you buy. These taxes are considerably higher in some areas of the country, which can dramatically increase your monthly payments.
How to Calculate House Affordability
You need to have some basic facts on hand to use the House Affordability Calculator. You may know exact numbers, or you may have to estimate a few items. Try to get as close as you can to your actual finances to get the most accurate calculation of how much of a house you can afford.
Here are the numbers you’ll need to know or guess at:
Debt-to-income ratio (DTI): which you calculate by dividing your monthly debt payments by your monthly after-tax income.
Interest rate: the percent of interest the loan issuer charges you to borrow the money.
Property tax: an estimate of your local government taxes on your property.
Homeowners insurance: the cost of insuring your new home, which is rolled into your monthly mortgage payments.
Private mortgage insurance (PMI): a special type of insurance required by many home lenders in case you default on your loan.
Homeowners association (HOA): dues if your neighborhood has and requires you to join an HOA.
Annual income: the total income you and your spouse earn in a year.
Down payment: how much cash you’ll be able to pay down on your new home.
Plug all these numbers into the Home Affordability Calculator, and you’ll see just how much home you can afford. Change any of the numbers to run different scenarios based on different financial options.
How much house can I afford with an FHA loan?
An FHA loan requires only a 3.5% down payment if you have a credit score of 580 or higher (or 10% down if you have a lower score), so you can get a good amount of house for little initial investment.
FHA loans are only available up to a maximum of $420,680 in most parts of the country.
How much house can I afford with a VA loan?
If you’re a military veteran, you may qualify for a loan backed by the VA. VA loans don’t require mortgage insurance, so they’ll have lower monthly payments than similar FHA loans.
More importantly, a VA loan doesn’t require a down payment, so veterans can get into new housing with minimal upfront costs.
How much house can I afford on my salary?
How much house you can afford depends not just on how much money you make but also on several other key factors. Generally, the higher your salary, the more expensive a house you can purchase.
Use our Home Affordability Calculator to determine more accurately how much house you can afford.
What are the upfront costs of buying a home?
Even though you finance the majority of a new home’s cost, you still need to have a fair amount of cash on hand to pay for upfront costs.
These costs can include earnest money (typically 1% of the purchase price, which goes towards your down payment), closing costs (2%-5% of the total mortgage amount), prepaid property taxes and home insurance for the first 6-12 months, and, of course, your down payment, which can run anywhere from 3% to 20% of the total cost.