How Much Home Can You Afford?

The first and biggest question homebuyers ask is “how much can I afford to pay for a home?” Getting the answer can seem a little tricky at first, but figuring it out isn’t too difficult if you know what to consider.

What determines a home’s affordability?

Let’s start with the basics. There are several factors that can determine how much you can afford to spend on your home:

• Income: Your (and your co-borrower’s) annual income before taxes is key to determining what you can afford to pay for a home.

• Debts: In this case, debt includes things like car payments, credit cards or student loans. Your rent or current mortgage payments and utilities aren’t part of the official calculation, but it’s smart to have a rough idea of what utilities could cost in your new home.

  Tip: Paying off debts can help you reduce your mortgage rate and monthly payments.

• Credit score: Your credit score is crucial to determining your mortgage rate.

  Tip: Check out our tips on credit scores and how to improve them.

• Down payment: Bigger down payments can make monthly mortgage payments more affordable.

  Tip: Read our article on how to save for a down payment.

• Mortgage interest rate: Credit score, down payment and even location determine this.

  Tip: Learn more about what goes into a mortgage payment.

These are the factors lenders will look at to determine how much you’ll be able to afford. If you can, take steps to change anything that might not be working in your favor, like a low credit score or high debt-to-income ratio.

Take a close look at your existing budget

Taking a deep dive into your current financial situation and your budget can give a realistic idea of what you can afford. From there, you can try running some numbers based on these approaches:

• Some sources recommend that your total mortgage payment, including taxes and insurance, should not be more than 25% of your total income before taxes.

• Another school of thought many lenders follow is the “28/36” rule. Its guidelines say that you should spend no more than 28% of your gross monthly income on total housing costs, and no more than 36% on your total debt, including housing, credit cards, student loans, car payments, etc.

• This percentage – your total monthly debt divided by monthly gross income – is your debt-to-income (DTI) ratio. To get a better understanding of your DTI, take a look at these guidelines.

Test what fits your lifestyle best now & in the future

Another commonsense approach to determining how much home you can afford is to look at how the costs of home ownership will fit into your overall financial goals, budget and lifestyle, and putting them to the test.

As a starting point, estimate what your new home ownership costs might entail, including:

• Monthly mortgage payments

• Homeowners’ insurance

• Property taxes

• Utilities

• Maintenance

• Potential repairs (Check out this article for a closer look at the hidden costs of homeownership.)

Next, try to determine how easily you could handle adding these new homeownership costs to your general monthly budget combined with any anticipated future costs, such as getting a new car or starting a family.

For instance, if you expect to spend an extra $1,500 each month on home-related costs, try putting that amount into a separate account where you can’t touch it. If you can live on $1,500 less a month, while living comfortably and meeting your other financial goals and obligations, you may have found a mortgage that’s a good fit.

Use our free mortgage calculators to help crunch some numbers.

Find a home that fits your budget

When you know what your price range is for buying a home, you’re ready for the fun part.

Take some time to look at major real estate websites to get an idea of what kinds of houses are available in your price range and where they’re located. You may save yourself time when you actually get out to tour homes by knowing about neighborhoods or amenities that fit your style and budget.

When you’re ready to go look at houses, a trusted real estate agent can guide you to the types of homes and neighborhoods that are within your ballpark budget.

Looking at your budget and doing your homework can be time-consuming, but making the effort up front will give you the information you need to confidently make an offer on a home you know you can afford.

Ready to buy? Get in touch with our local mortgage lending experts or get preapproved. 

Still researching? Explore our Mortgage Learning Center.