How Much Home Can You Afford?

As you begin to think about buying a home, it's important to be realistic about how much you can actually afford. See more on what to keep in mind as you venture into home buying – starting with using the PenFed Affordability Calculator, which can help you figure out your budget.

A home affordability calculator only needs a few pieces of information, starting with your annual income. If you're purchasing with a joint borrower(s) or combining assets, use the total income for all parties. You'll also need an estimate of your recurring monthly debts, including all credit cards, car payments, and overall monthly outgoing bills. Determine what you might have for a down payment and the term of your loan (for example, a 30-year mortgage). The calculator will quickly provide a range of what you might be able to afford.

What is DTI?

DTI stands for debt-to-income ratio. This is an equation that calculates all your monthly debt payments, including your proposed housing debt, and compares it relatively to your pre-tax income. The following is a DTI example:

●  Total monthly pre-tax income = $4,000

●  Total monthly debt payments including mortgage, taxes, and insurance total = $1,140

●  Your DTI is $1,140 divided by $4,000 = .285 or 28.5%

What are total homeownership costs?

It's not uncommon for a financial institution to inform you that you can afford more than you thought you could. Before looking at the bigger, more expensive home, fully understanding the total cost of homeownership is important.

A monthly mortgage payment is only part of buying a home. You may need money for a down payment on your home, as well as closing costs, property tax payments, insurance, possibly private mortgage insurance (PMI), and more. Here are some additional expenses you may want to consider before taking the plunge into homeownership:

●  Possible homeowners association (HOA) fees

●  PMI or monthly insurance premium (MIP) – may be an expense if you don't have a VA loan and put down less than 20%

●  Water

●  Electric

●  Trash collection

●  Appliances and repairs

●  Roofing care

●  Pest control

●  Yard care and tools

●  Heating and air conditioning (HVAC)

How much of a down payment do you need?

There are several ways to answer this question. Typical guidance is a 20% down payment if you can afford it. However, on a $250,000 home purchase, that means you'd need $50,000 for the down payment, and you’d still need another 2-6% for closing costs. Let's examine down payment needs across a few different loan types to better understand what you can afford. You should note that while typical guidance is a high down payment, as it lowers lenders’ risk to loan you money, most lenders have down payments in the 3-5% range, or if you’re eligible for a VA loan, that could potentially mean $0 down payment!

How much can you afford with a VA loan?

One of the biggest benefits of VA loans is that they typically require no down payment and generally offer better rates. The potential costs for a $250,000 home with a VA loan:

●  Require that the down payment may be as low as $0

●  Closing costs are generally between 2-6% of the purchase price

How much can you afford with a conventional loan?

You can typically get a conventional loan by putting down as little as 3-5%. However, if you have a down payment of less than 20%, you’ll need to have PMI, which is a monthly cost incorporated into your home payment. The potential costs for a $250,000 home with a conventional loan:

●  With 5% down = $12,500 down payment

●  Closing costs between 2-6% of the purchase price

●  Monthly PMI payment

How much can you afford with an FHA loan?

FHA loans can require as little as a 3.5% down payment but will also require MIP. With MIP, you may have to pay an up-front and an annual mortgage insurance charge. With both PMI and MIP, you could be paying additional insurance payments for years until you've built up enough equity in your home, or possibly for the life of the loan. The potential costs for a $250,000 home with an FHA loan:

●  With 3.5% down = $8,750 down payment

●  Closing costs between 2-6% of the purchase price

●  Possible up-front and required ongoing MIP payment