Can I Afford to Buy a Home?

Many people dream of owning their own home years before they are actually ready to jump into the process. It can take time for prospective buyers to build savings and prepare to make that dream a reality. However, others may be surprised when they start their initial research and learn that they can already afford to buy a home.

It takes most people time to line up their finances or income with the cost of homeownership. Throughout this article, we will dive into the details of what buying a home may cost you and tools you can use to determine if you can afford to buy a house.

How to afford a house

Before you start the homebuying process, it is important to have a clear understanding of your personal finances and to research the current housing market. For instance, the median cost of houses for sale in the United States is forecasted to be around $410,700 for the year 2025 (according to the National Association of Realtors^®). That means a 20% down payment could cost as much as $82,140. And that does not include the closing costs.

That said, there are many savings options available to homebuyers. Federal Housing Administration (FHA) loan borrowers may be able to put down as little as 3.5%, and Veterans Affairs (VA) loans do not require a down payment so long as you meet the military service qualifications.

What percent of your salary should go toward your mortgage?

General guidance is that no more than 28% of your gross monthly income should be spent on mortgage payments. This includes the principal amount, plus interest, taxes, and mortgage insurance.

What is a home affordability calculator?

When you start your homebuying journey, lenders will look at a variety of factors to understand how ready you are to purchase a home, and that you are ready to make the required monthly payments. Before getting too deep into the process, make sure that you have a general understanding of what you can afford. A great place to start is using a home affordability calculator with your financial particulars as inputs. 

Most mortgage affordability calculators will ask you to input your annual income. You can use combined income if purchasing with a co-buyer or spouse. It also asks for your ongoing monthly debts. You will need to account for car payments, credit card payments, and home equity or other loans you may have to get a handle on your overall debt. You will also need to enter a projected down payment and interest rate, as well as the term of your loan. The term is the length of the loan; typical terms are 15, 20, and 30 years.

This sort of calculator is a great way to begin your research and may help you realize that buying a home might be within your financial reach even sooner than you think. Even if the calculator can only provide an estimated range of affordable home prices and monthly mortgage payments, having these numbers in mind can make it easier to know what you are saving toward. However, there are a lot of variables that go into the final homebuying and approval equation.

How important is my credit score when buying a home?

Your credit score can affect your potential interest rate and will ultimately impact your ability to obtain a home loan. Assume two different people have the exact salary, monthly debts, and down payment amount. If one person has a great credit score, and another has a low credit score, the person with the lower credit score might need to improve their credit before securing approval for a mortgage loan.

There are many ways to improve your credit score if you need to, and it is good to stay on top of what the credit agencies are reporting about your credit, regardless of the competitiveness of your score. It is not uncommon for there to be errors in the agencies’ reporting, and it is ultimately your responsibility to ensure the reporting data is correct. It is important to understand your credit score and creditworthiness early in the homebuying process. This will allow you to make corrections and improve your score over time, should you need to.

How does my debt-to-income ratio (DTI) affect my homebuying power?

DTI is used by lenders to better understand your ability to afford a home. If you are looking to buy a home, it is a good idea to pay off as much debt as possible before applying for a mortgage. Not only will this reduce your DTI, but it will likely improve your credit score. Monthly expenses like gym memberships, utilities, and even insurance are not included in DTI calculations. Be aware that most lenders will not even consider anyone with a DTI higher than 43%.

How to calculate DTI:

• Add up your monthly expenses, including car payment, credit card(s), rent, and school loans. Let us pretend as an example the amount comes to $1,500 total.
• Assume $5,000 monthly income (before taxes) for this example.
• Your DTI is your expenses ($1,500) divided by your gross income ($5,000) = $1500/$5000 = 0.3 or 30%. A DTI of 30% is likely to qualify for a loan.

How much of a down payment do I need to buy a home?

The amount of down payment you need depends on several factors. One is the type of mortgage loan you get. For example, if you are eligible and apply for a VA loan, you might not need a down payment at all (unless you decide you can afford one and want to start out with more equity). Some other loan types require 3% to 5% as a minimum. Typical guidelines recommend 20% as your target.

Your down payment can come into play in the overall purchase process in several ways. First, if you put less than 20% down on most loans, excluding a VA loan, you will need some type of mortgage insurance. This is a monthly fee, usually paid with your mortgage, that protects the lender. Another way a down payment can factor in is if you are placing a lot of money down. While not as common, having a large percentage of the home price as a down payment reduces the risk for the lender, which makes the buyer a more attractive candidate for a loan. 

What role do interest rates play in determining what I can afford?

Mortgage interest rates fluctuate over time with the market. There are ways to reduce your interest rate through different loan types, such as adjustable-rate mortgages (ARMs). Another way to reduce your interest rate is to pay points at closing. A point is 1% of the total loan. Paying points at closing can help you reduce your overall rate for the length of the loan.

Can I afford a house?

The biggest takeaway is that taking a serious look at your finances and starting to prepare when you are first thinking about buying a home can help you to understand all of your options and get the best loan for the home that fits your lifestyle and financial situation. You might find that you need to spend some more time getting your finances in order, or you might learn that you are ready to buy now.