Calculating how much house you can afford
There are a few ways to figure out how much house you can afford. Some say your maximum monthly mortgage payment should be one week’s salary. The Federal Deposit Insurance Corporation (FDIC) suggests most people can afford a mortgage two or three times their household income.
However, there are other factors to consider — just because you make $40,000 per year doesn’t automatically mean you can afford a $120,000 mortgage.
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
We used the 28% rule (explained below) and the following assumptions to determine whether a home's price is affordable.
- Private mortgage insurance: PMI is assessed by banks to help cover risks associated with home loans for buyers who make smaller down payments. We assume a 1% annual PMI fee for home purchases with less than 20% down for this calculator. 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 qualify for?
Depending on your income, what you can borrow for a mortgage isn’t always the same as how much you should take out — you want to avoid feeling house poor.
Your annual income should be at least a third of what your mortgage is, according to Larry Steinhouse. Steinhouse is a long-time real estate investor and author of the new book “Money Hacks: Because Everything You Think You Know About Money is Wrong.”
“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 you make $100,000, your mortgage should be no more than $300,000.
For investment properties, the quick rule of thumb is 1% of what you can make off of it. For example, if you buy a rental property for $100,000 and make $1,000 per month on it, then you’re getting a good deal.
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 housing expenses should not exceed 28% of your monthly gross income, as Steinhouse suggests.
Similarly, some financial experts recommend that a person’s total monthly payments toward debt, including their 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 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 this percentage.
What determines how much mortgage you can get?
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.
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 credit score plays a significant 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 increase it.
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.
Income and debt
Your debt-to-income ratio (DTI) 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.
A good DTI to buy a house is under 36%, though some lenders will accept up to 43%.
To calculate your debt-to-income ratio, make a list of all your regular monthly debt payments and the amounts, including:
- Mortgage payments (with taxes and insurance)
- Car payments
- Student loan payments
- Average credit card payments
- Personal loan payments
- Alimony payments
- Child support payments
To calculate your DTI, add these together, divide the total by your gross monthly income and multiply the result by 100 to convert it to a percentage.
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.
How much you put down on a house largely depends on the house’s value. Average down payments also vary by loan type. Most lenders want between 5% and 20% down on a conventional loan. FHA loans are backed by the Federal Housing Authority and typically require a 3.5% or 10% down payment. You could buy a $250,000 house with $9,000 to $25,000 down through the FHA.
If you can afford it, there are advantages to making a more substantial down payment. If you put down 20% or more on a conventional loan, you normally don’t have to pay for mortgage insurance.
Rates and points
A mortgage rate is the interest charged on the principal home loan amount. Available mortgage rates change frequently based on various economic and market factors. The difference between your mortgage rate and APR is that APR includes other costs, like fees and mortgage (or discount) points.
With mortgage points, you get a “tradeoff between your upfront costs and your monthly payment,” according to the Consumer Financial Protection Bureau. In other words, you pay for points upfront in exchange for a lower rate. One point equals 1% of the loan amount.
Additional costs and fees
You also may want to have enough money set aside to make some home improvements before you move in, like updating the flooring or even just painting the walls. 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.).
Bottom line: How much mortgage can you afford?
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.
The type of mortgage also affects rates, terms and down payment requirements. For example, a conventional mortgage has stricter 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 qualifications. Still, you may end up paying more for mortgage insurance on an FHA loan, and government-backed loans have specific property standards.
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.
- Steinhouse, Larry. Zoom interview. November 22, 2021.
- Federal Deposit Insurance Corporation (FDIC), “How Much Mortgage Can I Afford?” Accessed December 7, 2021.
- National Association of Insurance Commissioners (NAIC), “Dwelling Fire, Homeowners Owner-Occupied, and Homeowners Tenant and Condominium/Cooperative Unit Owner’s Insurance Report: Data for 2018.” Accessed December 7, 2021.
- Consumer Finance Protection Bureau (CFPB), “What are (discount) points and lender credits and how do they work?” Accessed December 7, 2021.
- Consumer Finance Protection Bureau (CFPB), “What is the difference between a mortgage interest rate and an APR?” Accessed December 7, 2021.
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