How much house can I afford?
If you’re in the market to purchase a new home, congratulations! Buying property can be a great investment, and owning a home is an exciting milestone. As you enter the process, one of the first things you need to do is set and understand your budget. How much house can you afford? We put together this guide and our mortgage calculator below to help you determine which houses are in your budget.
Understanding how much you can afford to spend on your next home requires looking at multiple variables, including your loan term, mortgage interest rate, down payment and property taxes in your area. Use the ConsumerAffairs mortgage affordability calculator below to discover what house price you can realistically afford.
Mortgage calculator methodology
To determine whether a home price is affordable, we used the 28% rule and the following assumptions.
PMI: Private mortgage insurance, or PMI, is assessed by banks to help cover risks associated with home loans for buyers with smaller down payments. For the purposes of this calculator, we assume a 1% annual PMI fee for home purchases with less than 20% down. If you make a down payment greater than or equal to 20%, we do not include PMI costs.
Homeowners insurance: According to the National Association of Insurance Commissioners, the average annual premium for the most common type of homeowners insurance in the U.S. is $1,249. For most homeowners, the annual costs for a homeowners insurance policy are around 0.35% of the home price. Check with your insurance agent for a more personalized estimate.
How much mortgage can I afford?
There isn’t one factor that determines how much house you can afford — you should consider a series of factors and formulas to help you determine what your budget should be. Knowing how much you can afford to pay each month in a house payment is a good first step. Your total mortgage payment will be made up of more than just the principal loan amount; you’ll need to factor in interest, taxes and insurance to get a clear picture of your future mortgage payment. Be sure to include other expenses, such as homeowners association dues, any planned home maintenance projects and regular upkeep costs like lawn care.
Follow the 28/36 rule
The 28% rule is a widely accepted rule of thumb for determining your ideal mortgage payment. The rule is simple, stating that your maximum household expenses should not exceed 28% of your monthly gross income.
Similarly, some financial experts recommend that a person’s total monthly payments toward debt, including a mortgage, student loans, car payment, credit card debt and any other debts, not exceed 36% of their gross monthly income. You may hear this commonly referred to as your debt-to-income ratio.
Lenders decide whether or not they can preapprove you for a loan in part by examining your debt-to-income ratio. Lenders factor in your new house payment, including insurance costs and property taxes, as they calculate the percentage.
Calculate your debt-to-income ratio
To calculate your debt-to-income ratio, make a list of all your regular monthly debt payments and the amounts. Add these together and divide the total by your gross monthly income, then convert the number to a percentage. Don’t forget to consider the following monthly debts when calculating your debt-to-income ratio:
- Mortgage payment, including taxes and insurance
- Car payment
- Student loan payment
- Average credit card payment
- Personal loan payment
- Alimony payment
- Child support payment
Check your credit score
Your credit score plays a large role in determining the mortgage rate you qualify for. Check your credit score to know where you stand. If your score is ranked as fair to poor, you may want to consider putting off buying a home for a bit as you work to raise your credit score. Even a few months dedicated to paying down your debts can make a big difference in your score and help you secure better financing terms when you’re ready to apply for a mortgage.
Save for a down payment
Your down payment is the amount of cash you pay upfront toward your home. The more money you put down, the less you’ll need to finance and the lower your monthly payment will be. You may also be able to qualify for a better interest rate with a higher down payment.
You’ll want to put a down payment of at least 20% of the total cost of your home to lower your monthly payments and avoid paying mortgage insurance. However, it is possible to buy a home by putting less money down. An FHA loan, which is backed by the Federal Housing Administration, only requires homeowners to put down 3.5%, and mortgage lenders will go as low as 3% for a minimum down payment on a conventional loan.
Consider all house buying fees
Aside from your down payment, don’t forget about closing costs and other fees associated with buying a house, like homeowners insurance — which will be required if you’re taking out a mortgage — or a home warranty if you want to add an extra layer of protection for systems and appliances inside the home. You also may want to have enough money set aside to make any home improvements before you move in, like updating the flooring or even just painting the walls.
Understanding mortgage rates and options
A mortgage rate is the interest rate charged on the principal home loan amount. Mortgage rates change as often as daily and are affected by various economic factors. Your ability to qualify for the lowest rates from a lender depends on your financial profile, including your credit score and debt-to-income ratio.
The type of mortgage also affects rates, terms and down payment requirements. For example, a conventional mortgage has the most strict credit score requirements but may be able to offer lower rates than other types of loans. Government-backed loan programs, like those from the FHA or VA, offer easier qualification, but you may end up paying more for mortgage insurance on an FHA loan, and government-backed loans have specific property standards.
Bottom line: Should I buy a house?
Buying a home is a major decision. It's often an emotional decision, which is why it's so important to determine your budget before you start looking for a house. Use the home affordability calculator above as a starting point. Budget conservatively to make sure you have enough money to take care of your other debt payments along with your everyday expenses. Staying within your budget is important for your financial well-being.
Make sure to read through customer reviews of mortgage lenders to find one that will work with you to get you into the house of your dreams without putting you in more debt than you can afford to repay.
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