How Much House Can I Afford?
Before you hire a real estate agent and start house hunting, you first need to set a budget for your new home. With so many factors to consider — the down payment, interest rates, property taxes and your monthly expenses, to name just a few — answering the seemingly simple question “How much home can I afford?” is trickier than you might think.
Use this home affordability calculator to get a good sense of how much house you can afford before you start looking at listings and attending open houses. You’ll be able to go into the homebuying journey with the right expectations, quickly narrow down your options and find that perfect dream home.
Table of Contents
- Follow these steps before you use our calculator
- What is the 28%/36% rule?
- How much home can you afford: Keep these factors in mind
- What is debt-to-income (DTI) ratio and how does it affect your potential mortgage?
- How mortgage rates affect your mortgage payments
- How can I afford a more expensive home?
- Check out other mortgage calculators
- What price home can I afford with a VA loan?
- How expensive of a home can I afford with an FHA loan?
- Find the home of your dreams
Follow these steps before you use our calculator
You may be eager to start plugging numbers into our home affordability calculator and see what your budget looks like. That’s understandable — buying a home is exciting for anyone. But, first, you’ll need to take some preliminary steps to ensure the calculator yields accurate results:
- Collect the required information
- Figure out your desired monthly payment
Collect the required information
Our home affordability calculator weighs several factors to figure out how much home you can afford. It’s important to be honest with yourself about your financial situation and what’s reasonable to expect from your budget. The more accurate the information you put in, the better results you’ll see.
Be sure you have this key info available when using our calculator:
- Desired monthly payment: How much can you comfortably pay toward your mortgage each month? We’ll get into the specifics a little bit later, including how to figure out a monthly payment that’s right for your budget and how to use the 28%/36% rule to guide your decision.
- Down payment: The amount you can pay up front will have an enormous impact on the calculator’s results. Simply put: The larger the down payment, the more home you can afford.
- Interest rate: Mortgage rates determine how much interest you will pay over the lifetime of your home loan. That interest contributes to the overall cost of buying a home, so be sure you’re using the most current mortgage rates. Otherwise, you might be working with outdated information.
- Loan term: The length of your loan agreement will influence the amount of home you can afford as well. Generally speaking, you will qualify for a bigger mortgage if you apply for a longer loan term.
- Property taxes: Homebuyers often overlook how much property taxes will add to the total cost of their house. Be sure to take local property taxes into account to get a clear picture of what you can afford when buying a house.
- Homeowners insurance: Required homeowners insurance is another cost that’s easy to overlook when calculating the cost of homeownership. It may be relatively small compared with mortgage payments and property taxes, but insurance premiums add up over the length of a 30-year home loan.
Figure out your desired monthly payment
Arguably the most important number to have in your head before using our home affordability calculator is your desired monthly payment. Whether you’re applying for a 30-year, 20-year or 15-year mortgage, you are committing to a long financial obligation. You want to be absolutely certain you're comfortable making those mortgage payments every month.
Here are the biggest factors to weigh when figuring out your desired monthly payment:
- Net/take-home pay: Start by looking at your pay stubs to see how much money you have in your pocket after withholding taxes, 401K contributions and healthcare premiums. Use your net pay rather than gross to more accurately assess the funds you have available to put toward your mortgage each month. But keep in mind that your mortgage lender’s underwriters will base their decisions on your gross income.
- Monthly expenses: Deduct any expenses you pay every month from your net pay figure. That includes car loan payments, insurance premiums, groceries, internet bills and deposits into a savings account.
- Existing debt: If you have other forms of debt you need to pay down each month, such as personal loans, outstanding credit card statements and student loans, then be sure to factor those in as well.
- Down payment: A bigger down payment can help you lower the amount you pay each month on your mortgage. Every prospective homebuyer needs to weigh how much money they’re comfortable spending up front on a new house compared with their recurring home loan installments. Find a balance between the two that works for your budget.
What is the 28%/36% rule?
A good way to look at how much house you can forward is to use the popular 28%/36% rule. The principle is pretty simple: The amount you spend on housing should not exceed 36% of your gross monthly pay or 28% of your gross income plus all other monthly debt payments. As a reminder, gross income refers to the amount of money you make before deducting any withholdings from your paycheck.
Because lenders themselves often refer to the 28%/36% rule when assessing a loan application — among a lot of other criteria, to be sure — it’s a great way to anticipate how much you can afford to spend on your monthly mortgage. It’s worth noting that lenders have loosened their criteria over the years. In many cases, spending as much as 43% of your monthly gross income on principle, interest, taxes and insurance will still be acceptable to lenders.
The 28%/36% rule is a good starting point to create your house-hunting budget, but be sure to take into account all of your expenses and the size of your down payment. Break down your monthly budget and understand exactly how much money is left over to put toward a home loan that you can consistently meet without breaking a sweat.
How much home can you afford: Keep these factors in mind
Now that you have all of the information you need, you can use our home affordability calculator to figure out how much home you can afford. There are a few additional points you should consider as your budget comes together:
- Interest rates can fluctuate day to day, week to week and month to month. For most of 2020 and the first few months of 2021, the mortgage lending industry saw historically low interest rates, but as those rates creep back up, the amount you can afford will likely go down if your qualifications stay the same.
- Property taxes vary quite a bit as well, depending on your state, county and municipality. If your house search covers an entire metropolitan region, you may wind up paying significantly more in some towns than others.
- Paying a little bit more on your monthly mortgage installments may significantly affect how much home loan you can afford.
- Adding to your down payment also increases how much home you can afford.
- Compare mortgage loan terms to see how different mortgage agreements impact your homebuying budget. You may qualify for a larger loan if you choose a standard 30-year mortgage instead of a shorter term, but don’t feel like that’s your only option.
What is debt-to-income (DTI) ratio and how does it affect your potential mortgage?
One major qualifying factor you should keep an eye on is your debt-to-income (DTI) ratio. Your DTI is the percentage of your monthly income you devote to paying down debt, including student loans, car loans, personal loans and credit card debt. Mortgage lenders will closely scrutinize your DTI to determine how much risk they would be taking on to extend you a loan.
A lower DTI will increase your chances of getting approved for a mortgage and receiving more favorable loan terms and conditions — and that can have a knock-on effect on your monthly mortgage payments and what you can afford in a home. Generally speaking, 43% is the breaking point for mortgage lenders; any higher than that, and you may be denied a home loan.
Calculating your DTI is pretty straightforward: Add up all of the money you put toward paying your debt each month and then divide it by your monthly gross income. Run the numbers and assess your own DTI to get a sense of what your risk level is. Keep in mind that 43% is typically the absolute maximum DTI lenders will consider. Bringing your DTI down to around 36% will improve your chances of being approved for a mortgage as well as getting better home loan terms from your lender.
Government-insured loans tend to be a bit more forgiving when it comes to DTI. If you don’t see a viable way to lower your DTI — either by reducing your debt or increasing your income — it might be time to explore a loan insured by the Federal Housing Administration (FHA) or the Department of Veterans Affairs (VA).
How mortgage rates affect your mortgage payments
Mortgage rates determine how much interest you pay on your home loan, which in turn, impacts your monthly payments. A portion of every payment you make on your mortgage goes toward the interest you owe, while the rest is devoted to the principle. Higher mortgage rates mean you pay more money on interest each month — and that will add up over the course of a 15-year or 30-year mortgage.
Lenders take a lot into account when deciding what interest rate to apply to your mortgage loan:
- Current mortgage rates: Mortgage rates are based on a variety of factors, including bond markets, inflation, the overall state of the economy and the Federal Funds Rate set by the Federal Reserve. While all of this is outside your control, it’s good to be aware of, nonetheless.
- DTI: Lenders are, by their nature, risk-averse. If a sizable portion of your income is tied up in paying down existing debt, it’s fair to wonder how you’ll be able to keep up with your monthly mortgage payments. As such, lenders may set higher mortgage rates for borrowers who have higher DTIs.
- Loan-to-value (LTV) ratio: When extending a loan offer, lenders will calculate the LTV of the mortgage — that is, how big the loan is compared with the appraised value of the home. Lenders view lower LTV ratios more favorably since they indicate there’s less risk of the borrower defaulting on the mortgage. Like DTI, higher LTV ratios typically see higher interest rates, leading to more expensive monthly payments. Paying a larger down payment on your house will give you more equity from the outset as well as a lower LTV that lenders find so attractive.
- Credit score: Your credit score is another metric mortgage lenders will use to determine the amount of risk you present as a borrower and, by extension, what interest rate to set on your mortgage. Credit bureaus factor in outstanding debts, existing lines of credit and payment history when assessing your credit score. Higher credit scores indicate to lenders that you reliably pay your debts on time, use your open lines of credit responsibly and present less risk of defaulting on your loan.
How can I afford a more expensive home?
Everyone wants to get the very best home their money can buy, but you may find that even the top end of your budget won’t be competitive in your housing market. Here are five steps can you take to increase how much home you can afford:
- Increase your income: On the hunt for the perfect house, but your budget is holding you back? Now could be the time to push for that promotion you’ve had your eye on or even consider transitioning to a better-paying job elsewhere. Even a side hustle could help close the gap between how much house you want and how much you can afford. A lender may not consider recently acquired funds when assessing your qualifying income, but that extra cash could either go toward your down payment or paying down other debts.
- Cut back on expenses: If your DTI isn’t where you want it to be, look for ways to reduce your spending so you can devote more money to more productive goals like getting rid of debt or saving up for a down payment. Set a monthly budget and scale back on expenses that you can live without — at least for the time being.
- Lower your debt: Paying off some of your debt will lower your DTI and make you a more appealing loan applicant in the eyes of lenders.
- Improve your credit score: An uptick in your credit score could help you secure a better mortgage rate from your lender. Consider consulting a licensed credit expert if you feel like you need guidance on how to boost your credit score.
- Save up for a bigger down payment: Even with a good DTI and credit score, you will find your homebuying options are pretty limited if you don’t have the funds to make a significant down payment. Mortgage lenders traditionally prefer a larger percentage of the home’s value used for a down payment up front. A lower down payment could be acceptable, but you’ll pay more in monthly mortgage payments as a result. If you have a target price in mind for your dream house, start saving for that down payment and aim for a larger percentage for more favorable loan terms.
Check out other mortgage calculators
The homebuying journey can be daunting, especially when you’re dealing with a financial decision that could impact you and your family for decades. Arm yourself with as much information as you can to make the most informed decision possible.
Use these additional mortgage calculators to set the right expectations when it comes to financing your home purchase and understanding what options you have. As always, be sure to consult your loan officer and do your own research before committing to any offer.
- Mortgage calculator: It can be hard to visualize the day-to-day financial impact between buying, say, a $400,000 house and a $500,000 house. What does that price difference mean to your monthly mortgage payments? Our mortgage calculator helps you look ahead at what your ongoing financial obligations will be after you’ve closed on a home and gives you a better sense of what you’re comfortable paying when you buy a house.
- Fixed-rate mortgage calculator: You have a lot of loan options as a homebuyer, but fixed-rate mortgages are the most commonly used. Our fixed-rate mortgage calculator can help you figure out if a 15-year or 30-year mortgage is a better match for both your current financial situation and your future earnings.
- Refinancing calculator: Even if you choose the longest loan terms available, you potentially still have the option to change your mortgage rate later on. If interest rates go down in the future, refinancing your mortgage can help you take advantage of those lower rates and reduce the overall cost of your loan. Use our refinancing calculator to get a sense of how much money you may stand to save by refinancing your mortgage.
- Closing cost calculator: Closing costs are some of the biggest out-of-pocket expenses homebuyers need to plan for, but knowing how much money to set aside can be tough. Not so with our handy closing cost calculator — take advantage of this tool so you don't get blindsided by unforeseen expenditures at the time of closing.
- Extra payments calculator: Putting extra money toward your mortgage each month can help you pay off your loan and build equity in your home more quickly. Use our extra payments calculator to run the numbers and see if throwing more money at your mortgage each month is worth the added cost.
- Mortgage points calculator: Borrowers have the option of paying for mortgage points at closing to get a lower mortgage rate. “Buying down the rate” can help reduce your monthly mortgage payments, and our mortgage points calculator will give you an idea of how paying points will impact your interest rate and mortgage payments going forward.
- Rent or buy calculator: The upside to your monthly mortgage payments is that you know each one is building equity in your home. That’s not the case when you’re renting a unit, but when does it make sense to make the jump from living in a rental unit to buying your own home? Our rent or buy calculator calculates how much — if any — money you stand to save by buying a home of your own.
What price home can I afford with a VA loan?
As noted, government-insured loans are typically more forgiving when it comes to eligibility concerns like a higher DTI, low credit score and small down payment. Current or former military service members can take advantage of VA loans to get a more affordable loan, with or without a sizable down payment.
VA loan interest rates tend to be somewhat lower than conventional mortgage rates, but they are still influenced by the same trends within the mortgage lending industry. Both VA loans and FHA loans have loan ceilings that limit the amount a lender can extend to a qualifying applicant. For VA loans, those limits vary by county and are calculated by assessing local real estate markets. In many cases, homebuyers can borrow up to $548,250 with a VA loan, but you may be able to borrow more in areas with a higher cost of living.
How expensive of a home can I afford with an FHA loan?
FHA-insured loans are meant to help people with low or no credit, high debt or low funds qualify for a mortgage. The U.S. Department of Housing and Urban Development (HUD) analyzes local real estate markets to set maximum limits on FHA loan amounts. As of 2021, the FHA’s loan limit ceiling sits at $822,375 for the country’s highest-cost areas, but keep in mind that limit will be much lower for most real estate markets.
FHA mortgage rates often closely mirror conventional mortgage rates, but typically require a much lower down payment to qualify. You may be approved for an FHA loan option with as little as 3.5% of the purchase price to put forward as a down payment.
Find the home of your dreams
Whether you’re buying your first home, looking for a second property or searching for that elusive dream house, it’s always good to know from the start how much you can realistically afford to spend.
Use our home affordability calculator to set the right expectations as you start house hunting, and shore up any weaknesses in your risk profile to get the best loan terms possible.
Ready to take the next step in your homebuying journey and learn more about how the process works? Let us help you get in touch with a loan officer near you.