How Much Mortgage Can I Afford?

When you begin your homebuying journey, lenders will look at a variety of factors to understand how ready you are to purchase a home – including your ability to make the required monthly payments. Before getting too deep in a Zillow rabbit hole, make sure that you have a general understanding of what you can afford.

You’ll want to be able to answer questions like: Can I afford a mortgage? How much home can I afford? How much income should go toward a mortgage? Knowing your budget and planning ahead will make the homebuying process smoother and more successful.

Start with a home affordability calculator

If you’re wondering how much to spend on a house, or if buying is even within reach, a good place to start is with a mortgage affordability calculator. This allows you to input some basic financial details and generate potential home costs and monthly payments based on how much debt you want to take on and how quickly you want to pay off the loan.

Different calculators for home loans can provide varying insights. Let’s take a closer look at PenFed’s affordability calculator.

Here’s what you’ll input:

• Annual Income – Use combined income if purchasing with a co-buyer or spouse.
• Ongoing Monthly Payments – Include recurring monthly debts like car payments, credit cards, and other loans.
  
• Projected Down Payment – Estimate what you plan to put down on the house upfront.
  
• Loan Term – Choose a length of the loan such as 15, 20, or 30 years.

This mortgage loan estimate calculator will quickly provide a range of what you might be able to afford. The outputs include:

• Total Home Cost – This means the total purchase value of the property.
• Monthly Payment – A monthly mortgage payment can include the loan’s principal and interest, plus taxes and insurance.
  
• Ratio Slider – Adjust the slider to see potential home costs and monthly payments that are more or less risky. “Less aggressive” means you’ll have more cushion in your budget, while “more aggressive” may require extra sacrifice to afford higher monthly payments.

Let’s try an example with the following inputs.

The result shows you could potentially afford monthly mortgage payments ranging from $1,000 to $1,450, making your homebuying budget $370,000 to $532,000. If you prefer to avoid the extremes, $442,000 may be that “just right” home cost.

If you don’t like what you see or want to try other options, adjust the inputs with a higher or lower down payment or a shorter or longer term. Let’s try increasing the down payment to $20,000.

Now your mid-level home budget potentially increases to $452,000 while staying at the same $1,200 monthly payment.

A simple mortgage calculator like this is a great way to begin your research. It may even help you realize that homeownership is more attainable than you thought. But don’t get into a bidding war just yet. There’s a big difference between committing to a $380,000 and a $542,000 house – even if the monthly payments don’t seem that different. More variables go into a true loan estimate.

A deeper dive: How much mortgage will I qualify for?

Before you can get approved for a loan, a lender will take a careful look at your financial picture. Income, assets, and down payment are part of the equation. They also look at all of your liabilities and obligations, including auto loans, credit card debt, child support, potential property taxes and insurance, and your overall credit rating.

Income requirements for a mortgage

The guiding factor in any loan is demonstrating a borrower can repay the debt. Therefore, you must have a consistent income that can be documented. That can include a job, self-employment income, social security, pensions, and child or spousal support.

Guiding ratio: Debt to Income (DTI)

Having income alone isn’t enough. How much of your income is eaten away by other debts? DTI calculates all your monthly debt payments, including your proposed housing debt, and compares it relative to your gross (pre-tax) income. Most lenders will not consider a DTI higher than 43 percent.

To calculate DTI:

• Add up your recurring debt payments including car payment, credit card(s), rent, and school loans. Non-debt expenses like gym memberships, utilities, and insurance are not included.
• Divide by your monthly gross income.

For example:

• Let's pretend your monthly bills for a car payment, credit cards, and a mortgage add up to $1,500.
• Assume your monthly income before taxes is $5,000.
  
• Your DTI is $1,500 divided by $5,000 to equal .3, or 30 percent. That is a favorable DTI.

If you're looking to buy a home, remember: The lower your DTI, the better. It’s also smart to take stock of other monthly expenses such as utilities, subscription services, and insurance. Even if these aren’t taken into consideration for DTI, they still affect how much income you have available for a mortgage.

Down payment

How much you have available to put down on a home is an important component in a mortgage calculation. Twenty percent is a traditional down payment amount for conventional loans (it also usually allows you to avoid private mortgage insurance). If you put less than 20 percent down, your monthly mortgage payment will also include PMI, eating up some of your budget.

Alternatively, a large down payment reduces the risk for the lender. While it may require more advance preparation, offering a higher down payment can work in your favor long-term in the form of better interest rates and other favorable loan terms.

If twenty percent or more feels out of reach, you might see if you qualify for programs that allow a lower down payment. Conventional, FHA, and VA loans all have lower down payment options. And if you are eligible for a VA loan, you might not need a down payment at all.

Credit history

You may have noticed that credit score isn’t part of the equation in the mortgage affordability calculator. However, a credit pull is almost always part of the loan process, and the result will impact the terms of your mortgage – including how much loan you can qualify for.

Imagine two different people have the same salary, monthly debts, and down payment. If one person has a much higher score than the other, the person with the lower credit score may need to improve their credit before obtaining approval for a mortgage loan.

It's always smart to stay on top of what the credit agencies are reporting about your credit, regardless of the competitiveness of your score. It's not uncommon for there to be errors in the agencies’ reporting, and it's ultimately your responsibility to ensure the reporting data is correct. Getting on top of your credit information before you start shopping for mortgages will allow you to make corrections and give you time to improve your score, should you need to.

So, how much should you spend on a house?

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.

Total homeownership costs

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 mortgage insurance, and more. Here are some additional expenses you may want to consider before taking the plunge into homeownership:

• Mortgage insurance
• Homeowners association (HOA) fees
  
• Water
  
• Electric
  
• Trash collection
  
• Appliances and repairs
  
• Roofing care
  
• Pest control
  
• Yard care and tools
  
• Heating and air conditioning (HVAC)
  

The 28/36 rule

What percentage of income should go toward a mortgage? A general guide to knowing how much home you might be able to afford is to keep your housing expenses at or below 28 percent of your total gross income. Also, your total expenses (including housing) should be under 36 percent.

These percentages are the optimum amounts, but every borrower has different circumstances. In some instances, higher housing costs can be acceptable.

Different mortgage types and your buying power

A final note: How much you can afford for a house may depend on the type of loan you choose. Each mortgage program has different qualifications and requirements that can affect your buying power. See for yourself comparing three common mortgage types.

Making the final call

Taking an honest look at your finances when you’re first thinking about buying a home can help you to understand all 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.