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MORTGAGE KNOWLEDGE CENTER

PenFed Mortgage with Confidence

Home Buying Steps

  • Getting Started
  • Finding a Home
  • Getting a Mortgage
  • Home Ownership

Mortgage Topics

  • VA Loans
  • Conventional Loans
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image

CONVENTIONAL LOANS

Rates starting at % (APR %)¹

 

Apply before becoming a member.

After your application, we’ll help you:

1. Discover you’re eligible to become a PenFed member

2. Open a Savings/Share Account and deposit at least $5

  1. Home
  2. Mortgage Knowledge Center
  3. How Much Mortgage Can I Afford?

MORTGAGE

How Much Mortgage Can I Afford?

What you'll learn: How to use a mortgage affordability calculator and prepare for homebuying

EXPECTED READ TIME: 9 MINUTES

November 22, 2022

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.

Annual Income

Monthly Debts

Down Payment

Loan Term

$75,000

$1,000

$10,000

30 years

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.

 

Less Aggressive

Mid-Level

More Aggressive

Total Home Cost

$370,000

$442,000

$532,000

Monthly Payment

$1,000

$1,200

$1,450

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.

Annual Income

Monthly Debts

Down Payment

Loan Term

$75,000

$1,000

$20,000

30 years

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

 

Less Aggressive

Mid-Level

More Aggressive

Total Home Cost

$380,000

$452,000

$542,000

Monthly Payment

$1,000

$1,200

$1,450

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.

 

Conventional Loan

FHA Loan

VA Loan

Minimum Down Payment

20% is standard; Programs available for as low as 3%

3.5%

0%

Minimum Credit Score

620

As low as 500; Lenders typically require 620

None; Lenders typically require 580

Other Costs

Private Mortgage Insurance (PMI) if under 20% equity; Closing Costs

Mortgage Insurance Premium (MIP); Closing Costs

VA Funding Fee; Closing Costs

Usually best if you are…

In a favorable financial position

Unable to meet the requirements of a conventional loan

An eligible veteran, servicemember, or military spouse

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.

 

 

For more information about PenFed Mortgages:
 

PenFed Mortgage: 

800-970-7766

Get Started

SIMILAR ARTICLES

Creating Your Home Buying Budget

How much should you budget when buying a home? PenFed Credit Union offers a list of all the expenses and costs you may encounter as you complete closing your home.
Couple calculating a budget together

What Are the Different Types of Mortgages?

There are different types of mortgages for all financial situations. PenFed Credit Union provides details on different mortgages and which might be right for you.
couple researching on laptop together

Can I Afford to Buy a Home?

It is important to understand if you can afford to buy a home with your current income and expenses. PenFed has listed some tips for you to prepare to buy a home.
couple looking at a house on a laptop

What Are the Steps to Buying a Home? Part 1

If you are a first-time homebuyer, there is a lot to think about. PenFed Credit Union takes you through the steps of what you need to know before buying a home.
man researching homebuying on laptop
image

CONVENTIONAL LOANS

Rates starting at % (APR %)¹

 

Apply before becoming a member.

After your application, we’ll help you:

1. Discover you’re eligible to become a PenFed member

2. Open a Savings/Share Account and deposit at least $5

Home Buying Steps

  • Getting Started
  • Finding a Home
  • Getting a Mortgage
  • Home Ownership

Mortgage Topics

  • VA Loans
  • Conventional Loans
  • First Time Homebuyer
  • Home Equity
  • Homebuying 101
  • Checklists
  • Adjustable Rate Mortgages
  • PenFed Top 10
  • Refinance
  • Jumbo Loans
  • FHA
  • Videos

Mortgage Products

  • Mortgage Center
  • Refinancing
  • Home Equity

PenFed HELOC

Rates as Low as % APR* with flexible use of funds

Apply before becoming a member.

After your application, we’ll help you:

1. Discover you’re eligible to become a PenFed member

2. Open a Savings/Share Account and deposit at least $5

Disclosures

1Except for holidays, rates are updated Monday through Friday at 10:15am EST. The advertised rates and points are subject to change. The information provided is based on discount point, which equals percent of the loan amount, and assumes the purpose of the loan is to purchase a property with a 30-year, conforming, fixed-rate loan. Loan amount of $400,000; loan-to-value ratio of 75%; credit score of 760; and DTI of 18% or less. The property is an existing single-family home and will be used as a primary residence. The advertised rates are based on certain assumptions and loan scenarios, and the rate you may receive will depend on your individual circumstances, including your credit history, loan amount, down payment, and our internal credit criteria. Other rates, points, and terms may be available. All loans are subject to credit and property approval.

*Prime Rate is % as of . The APR for this Home Equity Line of Credit (HELOC) is based on prime plus a margin and can change monthly. Fixed Rate Advances will be amortized over the Fixed Rate Advance Term, with the payment consisting of principal and interest. Your Annual Percentage Rate for a Fixed Rate Advance will be calculated by adding your Prime Rate, your Margin, and the Additional Fixed Rate Lock-In Margin. Your Annual Percentage Rate for a Fixed Rate Advance shall not exceed 18% and shall be equal to or greater than % for primary residences and second homes.

  • Annual Fee: Notwithstanding the foregoing, an annual fee of $99 will be assessed on each account anniversary.
  • Home equity lines of credit (HELOC) are variable rate loans and the interest rate is subject to increase after consummation of the loan on monthly basis. Closing costs range between $500 and $8,500 for credit lines of $500,000. Contact a representative for additional details.

Appraisals: PenFed will attempt to establish value via an independent method. If that method is unsuccessful, or the value is not sufficient for the amount requested, an appraisal will be required regardless of CLTV. An appraisal is always required in the following circumstances:

For all loans with a loan amount greater than $400,000.

If an appraisal is required, it must be ordered by PenFed. You will be contacted for authorization and payment prior to ordering. Appraisal fees average $550 to $850 (some run higher).

  • Closing Cost Credit: PenFed will pay most closing costs associated with a home equity line of credit (HELOC), which includes credit report, flood certification, settlement/closing, property ownership and encumbrances search, recording, property search, and quick close. Member is responsible for any city, county, and/or state taxes if the subject property is located in FL, LA, MD, MN, NY, TN, or VA. If an appraisal is required, the member, who is responsible for the fee whether or not the loan closes, will pay the cost.

Interest may be tax deductible, consult a tax advisor for further information regarding the tax deductibility of interest and charges.

Fixed Rate Advance Lock-In You may lock in an Annual Percentage Rate for Advances during the Draw Period. During your Draw Period, you may choose to have three separate Fixed Rate Advances locked in at any one time, with a maximum of two new Fixed Rate Advances per calendar year. Each Fixed Rate Advance must equal or exceed Ten Thousand Dollars ($10,000.00) and you may not request a Fixed Rate Advance that would cause the amount you owe to exceed your Credit Limit. The only term option for your Fixed Rate Advance is 240 months (“Fixed Rate Advance Term”). However, the term of your Fixed Rate Advance cannot exceed your Repayment Period.

Fixed Rate Advances will be amortized over the Fixed Rate Advance Term with the payment consisting of principal and interest. Your Annual Percentage Rate for a Fixed Rate Advance will be calculated by adding your Prime Rate, your Margin and the Additional Fixed Rate Lock-In Margin. Your Annual Percentage Rate for a Fixed Rate Advance shall not exceed 18% and shall be equal to or greater than % for primary residences and second homes and 4.75% for investment properties.

Property Insurance: Property insurance is required.

Multiple PenFed Loans: Multiple PenFed Equity loans and HELOCs are available as long as the member and collateral qualify (except Texas). For Equity loans and HELOCs the total indebtedness cannot exceed $500,000 for all PenFed Equity and HELOCs combined.

PenFed does not lend on:

  • Mobile homes
  • Co-ops or time-shares
  • Properties that are currently listed on the market for sale
  • Commercial property or property used for commercial purposes, even if a residence is part of the property
  • Undeveloped property (land only)
  • Properties with more than 4 units

Properties that are currently under major construction/renovations: Property must be fully livable, with no safety issues. (Examples: no missing rails from stairs/decks, no open walls with wires showing, missing kitchen appliances/counters, missing bath fixtures or unfinished pool).

  • Additional limitations may apply

Home Equity Line of Credit:

  • This Account has a Draw Period of 10 years, followed by a repayment period of 20 years.
  • If only minimum payments are made during the draw period, the loan balance will not decrease.
  • In Texas, the maximum CLTV available is 80% on owner occupied properties. Additional restrictions apply in Texas, so please ask a representative for details.
  • In all other states, the maximum CLTV is 85% on owner occupied properties and second homes. Additional restrictions or requirements may apply based on application characteristics.
  • Property type of Condo has a maximum CLTV of 80%.
  • The maximum CLTV available is dependent on credit qualification.
  • Rates vary depending on owner occupancy and CLTV and other loan criteria.

Minimum Loan Amount Requirements in all States:

  • For an owner occupied property or second home the minimum loan amount is $25,000 and the maximum amount is $500,000 with a CLTV of 85% or less of the fair market value.

Other terms and conditions apply; call 844-918-4307 to speak with a representative for details. All rates and offers are subject to change without notice. To receive advertised product, you must become a member of PenFed.

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This credit union is federally insured by the National Credit Union Administration. Rates are current as of December 2023 unless otherwise noted and are subject to change.

APY = Annual Percentage Yield
APR = Annual Percentage Rate


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The content you are about to view is produced by a third party unaffiliated to Pentagon Federal Credit Union. PenFed takes no responsibility for the content of the page.


IMPORTANT NOTICE

You are leaving PenFed.org and entering a third party site. PenFed Realty, LLC is wholly owned by PenFed and this referral may provide PenFed a financial or other benefit.


For more information about the relationship between PenFed and PenFed Realty, LLC, see the Affiliate Business Arrangement Disclosure.


IMPORTANT NOTICE

You are leaving PenFed.org and entering a third party Website.


The content you are about to view is produced by a third party website that is unaffiliated to Pentagon Federal Credit Union. PenFed takes no responsibility for the content of the page.


IMPORTANT NOTICE

You are leaving PenFed.org and entering a third party site. PenFed Title, LLC is wholly owned by PenFed and this referral may provide PenFed a financial or other benefit.


For more information about the relationship between PenFed and PenFed Title, LLC, see the Affiliate Business Arrangement Disclosure.


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