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Buying a home is a huge undertaking. It's important to buy a house you and your family will love, and it's also important to make sure you can afford the mortgage payments. The amount you'll spend on a home will depend on the amount of your loan and the mortgage rate you lock in, coupled with other home expenses like property taxes, insurance, and sometimes homeowners association fees and private mortgage insurance. Here, we'll help you make the right financial decision and figure out how to answer the question: "How much house can I afford?"
As a general rule, your goal should be to make sure your housing costs don't exceed 28% of your income. But remember, your mortgage payment of principal and interest is only one of several expenses you'll incur in the course of buying and owning a home. You'll need to account for other costs like property tax and insurance.
Your mortgage payment may consist of a few different factors:
Say you're buying a $250,000 home and are making a 20% down payment. Let's also assume you're getting a 30-year fixed mortgage at 3.7% interest. Your total monthly payment in that scenario will be $1,218, broken down as follows:
Keeping your mortgage payment manageable will help ensure that you're able to continue paying it. You can use our "How much house can I afford" calculator above to look at mortgage rates to determine what your monthly payment will look like when accounting for things like:
If you use the above formula for buying a house, you'll be able to see if a home you're looking to buy is considered affordable. Say you want to make sure your housing costs do not exceed 28% of your income. Using the example above, you're looking at a monthly payment of $1,218. Divide $1,218 by 0.28, and you'll get $4,350. If your monthly paycheck is $4,350 or higher, that's likely an affordable home for you.
Your monthly income and existing debt and expenses will dictate how much you can afford to spend on a house. You can't rely on your income alone to figure out what mortgage to take on.
The 28%/36% rule states that you shouldn't spend more than 28% of your gross monthly income (your income before taxes and deductions) on housing. It also says you shouldn't spend more than 36% of your gross monthly income on all of the debt payments you have, including credit card payments and other loans. It's a good rule to follow when figuring out how much house you can afford.
Your debt-to-income ratio measures your monthly debt compared to your monthly income. A mortgage lender will use your gross income when calculating your debt-to-income ratio for mortgage approval. Generally, lenders like to follow the percentages above so that your monthly mortgage payment does not exceed 28% of your gross monthly income, and your total debt doesn't exceed 36% of your gross monthly income. However, if your debt makes it so your ratio is higher, you might still get approved for a mortgage, especially if you have a great credit score.
Keep in mind, though, that there's a difference between qualifying for a mortgage and being able to afford it comfortably. If you already have a lot of monthly debt payments before taking on a mortgage, you may find that it's difficult to keep up.
An FHA loan is a mortgage that is specifically designed for borrowers with lower incomes and credit scores. FHA loans are insured by the Federal Housing Administration (FHA). If you can't pay your mortgage, the FHA will help the lender recover their costs. As a result, lenders are able to offer FHA mortgages to borrowers with lower credit scores and incomes.
With an FHA loan, you can put as little as 3.5% down on a home purchase. If the 20% down payment for a conventional mortgage sounds daunting, an FHA mortgage could be a good option for you. But be careful: Making that small of a down payment could then make your monthly mortgage payment more expensive. A good way to determine whether you could afford the monthly payments on an FHA mortgage is by using a mortgage calculator. Then, you can see how much house you can afford with an FHA loan based on the cost of the home you're looking to buy and the down payment you plan to make.
If you're an active member of the U.S. military or a veteran, you may qualify for a VA loan. A VA loan is a mortgage that's backed by the U.S. Department of Veterans Affairs. With a VA loan, you don't need to put any money toward a down payment, and you may be eligible to get a mortgage even with a lower credit score.
As is the case with an FHA loan, you'll need to be careful with a VA loan to make sure you don't take on too high a mortgage, especially if you're not putting any money toward a down payment. Use a mortgage calculator to play with the numbers based on your loan amount and interest rate.
The amount you'll be able to afford on your salary will hinge on your existing debt and expenses. Earning the same salary as someone who can afford a $300,000 home doesn't automatically mean that you can afford a $300,000 home. A lot will depend on what your monthly debt and other bills look like.
The lower the interest rate on your mortgage, the less expensive your monthly payments will probably be. If you're searching for a home and want to get a mortgage, it pays to compare mortgage rates for several loan types.
The term of your loan will also dictate what your monthly mortgage payment looks like. A shorter-term loan -- for example, 15 years -- will leave you with a lower interest rate on the amount you borrow. But it will also result in a higher monthly payment, since you're paying off your home in half the time it would take with a 30-year mortgage.
You may run the numbers and determine you can afford a certain home and mortgage based on what your monthly payments will look like. But that doesn't mean you're guaranteed to get approved for the full mortgage amount you're after.
Going back to our example, say you want to buy a $250,000 home and have $50,000 on hand for a down payment. Your lender, based on your income and other factors, may only approve you to borrow $180,000.
If you don't have another $20,000 to put toward that home, it may not be an option. In that case, you'd either have to look for a less expensive home or postpone your plans to buy until you're able to save up more money to put down at closing.
It's a good idea to get pre-approved for a mortgage before you start looking at homes. You might run the numbers and determine you can afford a home of a certain amount, only to then not get approved to borrow what you need. If you start with a pre-approval letter, you'll see what loan amount you're eligible to take out and can work around that number when searching for homes.
So you've figured how much you can afford to spend on a home. That's a great first step. Now, you'll need to actually find a home that meets the right criteria. Here's how to go about it.
Once you know how much house you can afford, you'll need to find a mortgage lender. It's a good idea to shop around with different lenders to see what mortgage rates they're offering. You can simply google "mortgage lenders in my area" to see which options pop up. A better bet, however, may be to talk to people you know who recently got a mortgage and see which lenders they had success with. Doing so could help you narrow down your choices.
A mortgage pre-approval won't guarantee you a home loan. But if your financial circumstances don't change for the worse between when you get that letter and when you apply for a mortgage, then there's a good chance you'll have no problem getting approved for an actual mortgage.
A pre-approval letter will tell you how much money you're qualified to borrow for a home. It's a good thing to have when house hunting because it will help you know what price range to stick to. Plus, it might help you get an offer accepted on a home, as it sends the message you're a serious buyer whose finances have already been looked at.
You technically don't have to use a real estate agent to find a home. But as a buyer, there's no reason not to enlist an agent's services, since you don't pay a fee when you're on the buying side. A real estate agent can help you navigate your local housing market and figure out what offer to make on the properties you're interested in buying. An agent can also negotiate with sellers on your behalf.
Once you figure out which lender you want to use, you can apply for an actual mortgage. From there, you'll be approved or denied based on your financial picture. If you're approved, you won't get your money to buy a home right away. It can take 30 days or more to finalize a mortgage, because your lender will need to more thoroughly examine your finances and make sure your home appraises for a high enough price to justify your loan amount.
You'll also generally need to go through a home inspection before closing on your mortgage. During an inspection, a professional will determine if there are structural problems with the home, or problems related to things like mold, plumbing, and electrical setups. If problems are pinpointed, you'll need to work with your seller to have them addressed before you close on your home.
Once your lender is ready to close on your loan, you'll bring a check for your down payment and will sign the necessary documents to put your mortgage into place. You'll also have to pay closing costs on your loan, which can amount to 2% to 5% of your mortgage amount. Most lenders let you roll your closing costs into your mortgage and pay them off over time.
Whether you're a first-time home buyer or are moving from one home to another, it's important to know how much house you can afford. Crunch those numbers carefully before you make an offer on a house so you don't wind up overspending on a home and regretting it after the fact.
Here are some other questions we've answered:
Getting pre-approved for a mortgage loan is an important step in the home buying process. Our experts recommend mortgage pre-approval before you begin looking at houses or deciding on a real estate agent.
Generally, your mortgage payment itself should not exceed 28% of your income. That's a good limit to start with, but if your other bills are high or you have a lot of existing debt, you may want to keep your housing costs to a lower percentage of your income.
If you live frugally and don't intend to spend a lot outside of your housing costs, you may have more leeway to buy a more expensive home. Being able to afford a home hinges on your income and existing debt and bills.
Your housing costs should not exceed 28% of your gross monthly income. Figure out how much you earn each month and then use a mortgage calculator to see what home loan you can swing.
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