How do construction loans work?
A construction loan can help you pay to build a new house or renovate an existing one. Read more about how they work and how to get one.
Leorah Gavidor
Use our mortgage calculator to figure out your budget
Owning a home is an important goal for many people, and homeownership means different things for different buyers — getting your very own keys gives you a place to settle down or raise a family or create lasting memories.
But this goal can be a daunting one because there is a lot of contradictory advice about how much money you should put down or how much house you can actually afford on your income. We make the process easier with a useful mortgage calculator and tips to make your homebuying dream a reality.
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.
You want your mortgage to fit comfortably in your budget — not be a constant stress. Don’t rely on a lender to tell you how much you can borrow, since this number can often be higher than how much you should comfortably take out.
» MORE: What is “house poor?”
“Let's say you make $100,000 a year; a lot of mortgage companies will run numbers and max out the amount of money you can actually afford — most likely $350,000 to $400,000. I think that’s too high,” Steinhouse said in a Zoom interview with ConsumerAffairs.
In other words, if your total household income is $100,000, your mortgage should be no more than $300,000.
For example, if a borrower's gross monthly income is $7,000, their mortgage payment should not exceed $1,960 (28% of $7,000), and their total monthly debt payments should not exceed $2,520 (36% of $7,000).
The 28/36 rule is not a hard-and-fast rule, and lenders may have their own guidelines or consider additional factors when evaluating a borrower's ability to repay a mortgage. However, it is a useful benchmark to help borrowers estimate how much house they can afford and how much debt they can comfortably take on.
Banks and mortgage lenders look at a range of factors when deciding how much you can qualify for, including your credit profile, existing debts and income. Your eligibility for the lowest rates also depends on your financial profile.
Your credit score plays a significant role in determining the mortgage rate you qualify for. The biggest mistake first-time homebuyers make is not knowing how much they can qualify for with their credit score, according to Steinhouse. You usually need a FICO score of 580 to 620 (or better).
Most lenders consider scores in the mid-to-upper-600s good for buying a house. Generally, the better your score, the better your interest rate.
Your debt-to-income (DTI) ratio refers to how much of your income goes to paying off existing debts. The way lenders see it, the more you have to pay toward debts, the less you have to put into your house payment. Ideally, you want a DTI ratio of under 36%.
» MORE: What is a good debt-to-income ratio for a mortgage?
Your down payment is the amount of cash you have saved up to pay upfront toward your new house. The more money you put down, the less you’ll need to finance and the lower your monthly payment will be. You may also qualify for a better interest rate with a higher down payment.
For conventional loans, putting 20% or more down allows you to waive private mortgage insurance (PMI).
» MORE: How much should you put down on a house?
With mortgage points, you get a “trade-off between your upfront costs and your monthly payment,” according to the Consumer Financial Protection Bureau. In other words, you pay points upfront in exchange for a lower rate. One point equals 1% of the loan amount.
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. Be sure to budget for other expenses, such as homeowners association dues and the costs of planned maintenance and upkeep (lawn care, pest control, etc.).
There isn’t one factor that determines how much house you can afford. You’re getting a good deal as long as the numbers make sense: “If you’re paying the same or less than you were in rent, it’s fine. If it's more, that may be a problem,” Steinhouse said.
Knowing how much you can afford on a monthly house payment is an excellent first step. However, 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 payments.
For the calculator, we used the 28% rule and the following assumptions to determine whether a home's price is affordable:
ConsumerAffairs writers primarily rely on government data, industry experts and original research from other reputable publications to inform their work. To learn more about the content on our site, visit our FAQ page. Specific sources for this article include:
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