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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 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 figure out how to answer the question "how much house can I afford?" so you make the right financial decision.
How much mortgage payment 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.
Keeping your mortgage payment manageable will help ensure that you're able to continue paying it. You can use our mortgage calculator and look at mortgage rates to determine what your monthly payment will look like when accounting for things like:
- The amount of your home loan
- The mortgage interest rate you lock in
- The term of your loan
What factors help determine how much house can I afford?
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.
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Why should I follow the 28/36% rule?
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.
How does my debt-to-income ratio affect affordability?
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.
How much house can I afford with an FHA loan?
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.
How much house can I afford with a VA loan?
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.
How much house can I afford on my salary?
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.
Learn more about specific loan type rates
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.
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 so you don't wind up overspending on a home and regretting it after the fact.
FAQs
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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.
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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.
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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.
About the Author
Maurie Backman has been writing about personal finance for years. A firm believer in educating readers without boring them, she aims to produce content that's interesting, engaging, and easy to understand. Sometimes, she'll even make the occasional joke. Maurie started out as a writer for Fool.com and joined The Ascent team in early 2019. In her spare time, she enjoys hiking, reading, and reveling in the fact that her creative writing degree actually amounted to something.
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