How Much House Can I Afford?

Buying a house brings along a wide range of emotions, from nervous excitement to sheer dread over the financial commitment. You might be tempted to make a full-price offer on the first house you see. However, it’s not necessarily the best decision you can make.

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Just as the type of home you purchase affects the way you live your life, so too does the amount of money you spend. Your mortgage payment is probably your largest monthly expense, and if it’s too high, you might struggle to meet other financial obligations.

Or you might be ok paying for the necessities but may not have the wiggle room for fun purchases you typically enjoy. Before you start binging on Zillow searches, take a few moments to thoughtfully consider how much house you can afford.

Assessing Your Financial Readiness for a Home Purchase

When it comes to homeownership, the first step is to examine your current financial situation. Understanding where you stand financially will give you a clearer picture of what you can afford in terms of a mortgage and the ongoing costs associated with owning a home.

Calculating Your Net Income

Your net income, the amount you take home after taxes and other deductions, is the foundation of your budget. To begin, tally up your monthly take-home pay. If your income varies because of bonuses, commissions, or overtime, calculate an average based on the past six months to a year. This gives you a realistic figure to work with.

Listing Your Current Debts

Next, list out all your current debts. This includes car loans, student loans, credit card debts, personal loans, and any other obligations you might have. For each debt, note down the monthly payment and the remaining balance. This will not only help in understanding your debt-to-income ratio—a key factor that lenders consider—but also in prioritizing debt repayment.

Analyzing Monthly Expenses

Now, scrutinize your monthly expenses. Start with the fixed costs like rent, utility bills, insurance premiums, and subscriptions. Then, estimate variable expenses such as groceries, entertainment, and dining out. Don’t forget to include periodic expenses like annual memberships or car maintenance costs, dividing these by 12 to get a monthly figure.

Setting Aside for Savings and Emergencies

The importance of saving is often overlooked when evaluating a budget. How much are you putting aside each month? Do you have an emergency fund? Financial experts often recommend having at least three to six months’ worth of living expenses saved up for unforeseen circumstances.

Balancing Your Budget

With all these figures at hand, subtract your total monthly expenses, including debt payments and savings, from your net income. The remaining amount is what you potentially have available for a mortgage payment. However, it’s wise not to stretch this number to its limit. Homeownership comes with unexpected costs, and you’ll want some breathing room in your budget for these.

Using Budgeting Tools and Templates

To make this process easier, consider using budgeting tools or templates. Many free resources are available online that can help you categorize and track your expenses, providing a clear view of your financial health.

By thoroughly evaluating your existing budget, you position yourself to make a well-informed decision about how much house you can realistically afford, ensuring that your dream home brings joy rather than financial stress.

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Calculating Property Taxes and Homeowners Insurance

When budgeting for a new home, it’s important not to overlook the additional costs of property taxes and homeowners insurance. These aren’t just one-time fees; they’re ongoing expenses that will be included in your monthly mortgage payment.

Breaking Down the Costs

Your mortgage lender should provide a detailed breakdown of these costs. This information helps you understand the total monthly payment for homes at different price points. Property taxes vary greatly depending on the location and value of the home, and homeowners insurance can fluctuate based on factors like the home’s age, size, and construction type.

Utilizing Calculators for Better Estimates

To get a handle on these numbers, use a home affordability calculator or a mortgage calculator. These tools can help you experiment with different scenarios and price points, allowing you to find a comfortable monthly payment that includes these additional expenses.

Balancing Income, Debt, and Mortgage Payments

The affordability of a house depends significantly on two factors: your household income and your current debt levels. Lenders typically look at your debt-to-income ratio when determining how much they’re willing to lend.

Debt-to-Income Ratio: A Key Metric

Most lenders prefer a total debt-to-income ratio of no more than 43%. This means only 43% of your monthly pre-tax income should be dedicated to debt payments, including credit cards, student loans, car loans, and your potential mortgage.

Setting a Practical Mortgage Budget

Even if you have little to no debt, it’s wise not to allocate a large portion of your income to mortgage payments. Overextending can limit your financial flexibility in the future. Financial advisors often recommend that your monthly mortgage payment should not exceed 25% of your after-tax income.

Planning for the Future

Remember, buying a house is not just about meeting current financial obligations. It’s also about ensuring you can comfortably manage payments over the long term without compromising your financial security.

See also: The Ultimate Guide for First Time Home Buyers

Estimating Initial Home Buying Costs

Getting a loan without much cash for a down payment isn’t difficult. However, you almost always need some funds up front. FHA loans allow for as little as a 3.5% down payment. That means if you buy a $200,000 house, you’d need a down payment of $7,000. USDA and VA loans typically come with 0% down payments, so you don’t need any extra cash for this purpose.

However, the downside is that, except for VA loans, any mortgage with a down payment of less than 20% is subject to mortgage insurance. This is an annual expense you’re charged that protects the lender against default, since you don’t have much equity in the home.

The annual interest rate depends on your loan type and is divided up among your monthly payments each year. It can easily add $100 or more to your mortgage payment.

Exploring Mortgage Insurance Costs and Implications

In addition to the monthly charge, most loan programs charge a one-time mortgage insurance fee on top of your other closing costs. For FHA loans, you’ll be charged 1.75% of your loan amount.

If you have a mortgage of $193,000 (assuming you put down 3.5%) your private mortgage insurance (PMI) premium at closing would cost $3,377.50. That’s on top of your other closing costs, like fees for the home appraisal, attorneys, escrow, homeowners insurance, and others.

Most buyers pay between 2% and 5% of their new home’s purchase price. That could be as much as $10,000 for a $200,000 home. You can try to negotiate closing costs as part of the seller’s concessions, but this isn’t always possible, especially in competitive real estate markets. You may be able to finance them as part of your mortgage, but that again increases your monthly mortgage payments.

Future Planning: Beyond the Purchase

The amount you spend on a house should not only consider your current finances, but also your future needs. You might be in a steady job now, but if there’s anything 2008 taught us, it’s that nothing is ever certain. Do a quick mental audit and determine how prepared you are for an unexpected job loss.

Do you have enough in your savings to pay your mortgage and other necessary expenses? Most financial experts recommend having at least three to six months of income set aside to prepare yourself for this type of situation.

Whether you lose a job, become ill, or become the caretaker of a relative, you need a plan that protects your home from foreclosure in an emergency.

Retirement Savings

Another consideration is your retirement, even if it’s decades away. You may be betting that you can sell your home and downsize when you’re ready. However, there’s no way to predict real estate trends. The best way to a successful retirement is by limiting your necessary expenses so that you can afford to live on a smaller annual income.

If you’re confident in your current retirement savings, then you might be able to afford your mortgage when the time comes. Or maybe you’re young enough where you expect to have that 30-year mortgage paid off before you’re ready to retire.

But life throws so many curveballs, it’s impossible to really know what your finances will be like in your 60s. Of course, you don’t want to live your entire life in fear, but always have multiple game plans in mind, rather than relying on one “sure thing.”

Strategies for Buying a Higher-Priced Home

After researching and performing your due diligence, you might still find yourself ready to buy a higher-priced home. Maybe you need the space for your growing family, or perhaps you live in a city with a high cost of living.

After all, in many places, the cost of monthly rent is just as expensive—or even more so—than an actual mortgage payment. There are several ways you can bring down that monthly payment.

3 Ways to Qualify for a Better Interest Rate

When planning to buy a home, securing a favorable interest rate can significantly reduce your long-term financial burden. Here are effective strategies to help you qualify for a better rate:

1. Improve Your Credit Score

A higher credit score is key to unlocking lower mortgage rates. Your credit score reflects your creditworthiness and is a critical factor lenders consider. Here’s how to improve it:

  • Regularly monitor your credit report: Check for errors and dispute any inaccuracies.
  • Pay your bills on time: Consistent, on-time payments are important for a good credit score.
  • Reduce credit utilization: Aim to use less than 30% of your available credit.
  • Limit new credit inquiries: Too many hard inquiries can negatively impact your score.

2. Decrease Your Debt-to-Income Ratio

Your debt-to-income (DTI) ratio is another significant factor lenders look at. A lower DTI ratio shows lenders you are not overextended and can manage additional debt. You can improve your DTI by:

  • Paying down existing debts: Focus on reducing balances on credit cards, student loans, and other debts.
  • Avoiding new debt: Postpone taking on new loans or significant credit expenses.
  • Increasing your income: Consider opportunities for career advancement or side hustles to boost your income.

3. Increase Your Down Payment

A larger down payment can lead to better mortgage terms, including interest rates. It demonstrates your financial commitment and reduces the lender’s risk. To increase your down payment:

  • Save aggressively: Cut back on non-essential expenses and allocate more funds to your home savings.
  • Explore savings programs: Look into first-time homebuyer programs or other savings plans that can augment your down payment capacity.
  • Consider a side job: A temporary part-time job or freelance work can help accumulate additional savings.

By employing these strategies, you not only work towards securing a more favorable interest rate but also enhance your overall financial stability. Remember, the journey to improving your financial health is ongoing, and these steps can set a strong foundation for your future homeownership goals.

Refinancing Your Mortgage Down the Road

The good news is that once you have a mortgage, your loan terms don’t have to stay the same forever. You can refinance, which entails paying off your mortgage with a new loan with different terms.

Refinances have been popular recently because of historically low interest rates. However, the Federal Reserve has recently started implementing rate hikes, which are expected to continue gradually. While you shouldn’t count on lower interest rates for a future refinance, this process can help you in other ways.

Cash-out Refinancing & HELOCs

If you have equity in your home (typically 20% or more), you can do a cash-out refinance or a home equity line of credit (HELOC). Both allow you to access cash based on your home appraising for a certain value. You then either have a higher mortgage with the refinance, or repay the HELOC like you would a credit card.

The downside to a mortgage refinance is that it comes with all the costs associated with a new home loan. For example, you’ll have to pay for the appraisal of your home, usually amounting to a few hundred dollars. There will also be closing costs involved, which can either be paid for upfront or rolled into the new mortgage.

Because of these new expenses, you’ll need to do some math to figure out if the new loan makes financial sense for you. This, of course, depends on your goals, whether it’s lowering your monthly mortgage payment, getting out of your mortgage insurance, or cashing out on your equity.

A mortgage loan officer can help you with these calculations, but it’s also smart to crunch the numbers on different situations on your own. After all, you have no better advocate than yourself!

Bottom Line

Buying a home is expensive, no matter how you end up financing it. But it’s also an extremely personal situation that greatly influences how you live your life every day. The best way to figure out how much house you can afford is to find a balance between your heart and your head.

Obviously, you don’t want to be house-poor because of a mortgage, but you also want to feel safe, secure, and happy in your home. It’s an investment in yourself as much as it is an investment in real estate.

If you’re feeling overwhelmed with property listings, mortgage calculators, and loan applications, don’t be afraid to take a breather. Talk to a friend or family member who has bought a home in the past and ask for tips from their experiences.

They don’t have to dive into personal numbers, but they can give you an idea of things to be aware of throughout your own home buying process. When you’re ready, you can jump back into the process and get ready to afford the home of your dreams.

Frequently Asked Questions

How much of a mortgage payment can I afford?

When determining how much you can afford for your monthly mortgage payment, there are a few key factors to consider. These factors include your household income, existing monthly debts (such as auto loans and student loans), and how much you have saved for a down payment. Knowing what your monthly mortgage payment will be is important for having financial security.

Though your income and current debts may remain consistent, there may be unexpected expenses or random spending that can take a toll on your savings. It is recommended to have three months of payments, including your housing payment and other debts, in reserve in case of an unforeseen event. This will help you cover your mortgage payment.

How much house can I afford with an FHA loan?

FHA loans are backed by the Federal Housing Administration and may have more relaxed qualifying standards than conventional loans. With a down payment of at least 3.5%, you may be able to get an FHA loan.

If you have a lower credit score, this could be a suitable option for you. To find out more, you can use an FHA mortgage calculator. For a conventional loan, you can have a down payment as low as 3%, but you may have to meet more stringent qualifications.

How much house can I afford with a VA loan?

You may be able to qualify for a loan of up to four times your annual income, depending on your credit and other factors. Additionally, VA loan limits vary by county, so you may be able to qualify for a higher loan amount in some counties than in others. To find out more about VA loan limits in your area, talk to a VA-approved lender.

How much house can I afford with a USDA loan?

The maximum debt-to-income ratio for VA loans is 41%, but borrowers with higher ratios may still be eligible as long as they meet other requirements. VA loans don’t require a specific credit score, and borrowers don’t have to make a down payment.

How much house can I afford on my salary?

How much house you can afford also depends on your current debt, savings, and other financial obligations. Generally, it is recommended that your total housing payments should not exceed 28% of your gross monthly income.

Your total debt payments should not exceed 36% of your gross monthly income. You should also factor in the costs of maintenance, insurance, and taxes when determining how much house you can afford on your salary.

This is also known as ‘The 28/36 Rule.’

What is the 28/36 rule?

The 28/36 rule is a widely accepted guideline for calculating a homebuyer’s affordability. It states that you should not spend more than 28% of your gross, or pre-tax, monthly income on home-related costs. Furthermore, they should not spend more than 36% on total monthly debt, including mortgage, credit cards and other loans, such as auto and student loans.

How much house can I afford on a $50K salary?

You may be able to purchase a home between $175,000 and $250,000 with a salary of $50K per year. The exact amount you can afford, however, will depend on your credit score, debt-to-income ratio, and the size of your down payment.

How much house can I afford on a $70K salary?

On a $70,000 annual salary, you may be able to purchase a home between $245,000 and $350,000, depending on your debt load, where you live, and the type of loan you choose. The exact amount you can afford will depend on the cost of living in your area.

How much house can I afford on a $100K salary?

On a $100,000 salary, you may be able to afford a home in the $350,000 to $500,000 range or higher. However, a good income is not enough to purchase a house. You’ll need a good credit score, minimal debt, and a decent down payment to be successful.

Lauren Ward
Meet the author

Lauren is a personal finance writer who strives to equip readers with the knowledge to achieve their financial objectives. She has over a decade of experience and a Bachelor's degree in Japanese from Georgetown University.