How Much Mortgage Can I Afford?

Buying a home is a huge financial decision, one that many of us will make in our lifetime. If your goal is to become a homeowner, it is important to ensure that you can afford it. A lot of factors can have an impact on your ability to afford a home. These can include your income, credit history, and even the type of loan you choose.

In this article, we will help you determine if you can afford to buy a home. That way, you will be able to answer questions like: Can I afford a mortgage? What amount can I afford? How much income should go toward a mortgage? Knowing your budget and planning ahead can make the homebuying process smoother and more successful.

How much mortgage can 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, as well as auto loans, credit card balances, child support, insurance, and your overall credit rating.

Income requirements

One of the essential factors in determining whether you can afford to buy a home is your income. Lenders typically look at your debt-to-income (DTI) ratio to evaluate your ability to afford your mortgage payments. The DTI ratio is used to calculate and compare your monthly debt payments against your gross monthly income. If you have a lower DTI ratio, then you have a better chance of receiving mortgage approval. Note, though, that most lenders will not approve a loan with a DTI higher than 43%.

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 the total by your monthly gross income.

For example:

• Let us 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 0.3, or 30%. That is a favorable DTI.

It is also smart to take stock of other monthly expenses such as utilities, subscription services, and insurance. Even if these are not taken into consideration for the DTI calculation, they may still have an impact on how much income you have available for your monthly mortgage payments.

Down payment

Your down payment can also impact your ability to afford a home. A down payment is an upfront payment that is based on a certain percentage of the home's purchase price. Average down payment amounts range from 3% to 20% of the home's purchase price, but the exact percent you provide will likely depend on the type of loan you choose. A larger down payment will lower your monthly mortgage payments and reduce the amount you need to borrow.

Credit history

Your credit history is a crucial component to the mortgage application process. Lenders use your credit score to determine the interest rate and the terms of your mortgage. A higher credit score usually results in a lower interest rate and better loan terms. 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 want to take time to improve their credit before applying for a mortgage loan.

How do you know how much mortgage you can afford before applying?

So, how much should you spend on a mortgage? Financial experts typically recommend your total debt-to-income ratio, including housing expenses and other debt payments, should be no more than 36%. But what are the costs of homeownership you should be prepared for?

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

• Homeowners association (HOA) fees

• Water and electric

• Trash collection

• Appliances and repairs

• Roofing care

• Pest control

• Yard care and tools

• Heating, ventilation, and air conditioning (HVAC)

The 28/36 rule

A general guide to knowing how much home you might be able to afford is to keep your housing expenses at or below 28% of your total gross income. Also, your total expenses (including housing) should be under 36%.

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

Use a mortgage affordability calculator

If you are 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 us take a closer look at an affordability calculator. Here is what you will input:

• Annual income: Use combined income if purchasing with a co-buyer or spouse.

• Monthly debt: 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 up front.

• Loan term: Choose a length of the loan such as 10, 15, 20, or 30 years.

• Interest rate: Updated daily based on most current rates available. Your actual rate may be higher or lower.

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

• Estimated home cost: This means the total purchase value of the property.

• Estimated 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 depending on how much you are able to pay on a monthly basis.

Here is an example, using an interest rate of 6.75%:

Annual Income	$100,000
Monthly Debts	$1,800
Down Payment	$20,000
Loan Term	30 years

Consider researching the average prices of homes in areas you are interested in to get a better idea of the price range you can afford. Here are the results of our example:

Total Home Cost	Monthly Payment
$243,560	$1,450/mo

A simple mortgage calculator like this is a great way to begin your research. You will notice that the sliding scale on the calculator provides a wide range of results. It may even help you realize that homeownership is more attainable than you thought.

How do different types of home loans effect affordability?

How much you can afford for a house depends 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	Lenders typically require 620	None; lenders typically require 620
Other Costs	Private Mortgage Insurance (PMI) if under 20% equity; Closing Costs	Mortgage insurance premium (MIP), Upfront Mortgage Insurance Premium (UFMIP); 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

Taking an honest look at your finances when you are first thinking about buying a home can help you understand all your options and get the best loan for the home that fits your lifestyle and financial situation.

Buying a home is a significant financial decision, so it is important that you carefully consider several factors before jumping into the process. Your income, credit history, and the type of loan you choose can all impact your ability to afford a home. By using an online calculator, getting pre-approved for a mortgage, and considering your total homeownership costs, you can determine how much mortgage you can afford and make informed decisions about buying a home. 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.