By Ashley Gower
Nov 1, 2024Buying a home is an exciting milestone, but understanding how much house you can afford is essential before diving into the market. Determining the right monthly payment goes beyond just your salary—factors like debt, credit score, available down payment, and current mortgage rates all play a role in shaping your budget. In this article, we’ll help you assess affordability, including tips for using a Home Affordability Calculator to estimate your target range within your monthly budget. With these insights and our mortgage resources, you’ll be ready to confidently start your journey to financial security and generational wealth.
- Use our Home Affordability Calculator: Start with a home affordability calculator, considering factors like income, debts, and down payment to estimate a realistic home-buying budget.
- Debt-to-Income (DTI) Ratio & 28/36% Rule: Aim to keep housing costs below 28% of gross income and total debts under 36%. Lower DTI ratios may help secure better loan terms.
- Plan for Upfront Costs: Budget for down payments, closing costs, and inspections, plus explore down payment assistance and gift funds if available.
- Consider Additional Costs: Monthly expenses like property taxes, utilities, insurance, maintenance, and repair costs are important for realistic budgeting.
- Impact of Mortgage Rates and Credit Score: Higher mortgage rates and lower credit scores can significantly increase monthly payments, so improving credit can improve affordability.
- Focus on Personal Timing: Decide based on your personal financial stability, future plans, and readiness to plant roots—not just market conditions.
Home Affordability Calculator: Start by Crunching the Numbers
A home affordability calculator is a quick and helpful tool to get started. With just a few details—income, debts, and down payment—this snapshot can be a great starting point to identify a realistic target for your home-buying journey.
Click to check out our Home Affordability Mortgage Calculator
When calculating your own numbers, be sure to factor in:
Gross Income: Your annual salary before taxes.
Your gross income is the foundation of how much home you can comfortably afford. Include all earnings before taxes, bonuses, freelance income, retirement payouts, etc.
Debts: Monthly Payment Obligations
Debts like credit cards, car loans, child support or student loans are all factors in how much home you can comfortably afford.
Down Payment: Upfront Investment
Your down payment can lower your loan amount, and therefore your monthly mortgage. Higher down payments may also lead to better loan terms like interest rate.
With our calculator, you can play with different scenarios to see what factors affect your homebuying power. From there, we can discuss the details and work together to the right loan from different programs and options available to you!
How Much Home Can I Afford with My Salary?
Calculating your budget doesn’t only involve monthly payments; it’s about choosing a payment level that fits comfortably in combination with your lifestyle. Every person’s life is completely different, and so are their finances. Are you single? Do you have a family? Divorced? Are you retired? Do you have a lot of debt? No debt? You get the point!
Here’s an example:
Say you earn $100,000 annually, or $8,333 per month before taxes and deductions. Based on the 28% rule, a reasonable full monthly mortgage payment could be $2,333 (including mortgage, insurance, and taxes). You’ll need to consider other financial goals to ensure you’re not overextending yourself and can continue saving.
Mortgage Affordability: Your Debt-to-Income Ratio and the 28/36% Rule
Lenders use your debt-to-income (DTI) ratio to assess your ability to handle monthly mortgage payments. Actual loan guidelines (criteria of who qualifies for each type of loan) may allow for more debt, as high as 50% in some cases. A good rule of thumb for affordability is the 28/36% rule: housing costs should ideally be no more than 28% of your gross monthly income, while your total monthly debts—including housing—should stay below 36%.
For Example: If your monthly income is $4,500, a comfortable housing payment target would be $1,260 (28% of $4,500). Adding in other monthly debts, your total should ideally remain below $1,620 (36% of $4,500) to give you breathing room for savings, unexpected expenses, and daily needs.
Calculating your DTI Ratio:
- Add up all monthly debt payments (housing, car loans, child support, credit cards).
- Divide by your gross monthly income.
- Total Monthly Debt: $1,635
- Gross Monthly Income: $4,000
- DTI: $1,635 ÷ $4,000 = 41%
Reducing debt, like eliminating a credit card payment, can lower your DTI, helping your monthly mortgage payment more comfortable, and also making you less of a risk to lenders which can offer you better loan terms.
Pro Tip: Connect with one of our loan officers early in the home-buying process to ensure you understand the full scope of buying a home. From pre-qualification and pre-approval to budgeting and credit tips, our team is here to help.
What if I’m Self-Employed, Work on Commission, or am Retired?
If an affordability calculator feels too rigid, or if your income varies, reach out to us for personalized advice. We’ll go over your budget, review your loan options, and answer any questions so you’re fully confident before you buy.
7 Important Factors to Calculate Home Affordability
1. How does my monthly budget affect my mortgage payments?
Your DTI ratio is a good gauge, but only part of the equation, as it only considers true “debt” and only your gross income (pre-tax).
Other things you should consider in your budgeting decisions are your true monthly obligations and recurring costs, along with your Net income after taxes, insurance, and retirement savings are deducted.
Consider Budget Items Like:
- Childcare Costs
- Utilities: gas, water/sewer, trash, internet/cable
- Groceries
- Transportation
- Health Insurance/Medical Expenses
- Savings and Investments
- Entertainment
- Personal Care
Pro Tip: If you’re struggling to outline your true budget, reach out! We love helping to set our customers up for success, building a good foundation from the ground, up!
2. Upfront Costs When Buying a Home – Saving for the Down Payment
After understanding what your monthly budget can accommodate, now you can see what room there is in your budget to save for the upfront costs of buying a home. Here’s a breakdown:
- Down Payment: Generally 3-20% of the home’s price, though some loans offer zero down payment options. If your down payment is below 20%, you may need to budget for private mortgage insurance (PMI).
- Closing Costs: Typically 2-6% of the loan amount. Closing costs cover title fees, appraisals, legal fees, prepaid taxes, and other fees. For a $400,000 loan, closing costs might be between $8,000 and $24,000.
- Inspection and Appraisal Fees: Expect to pay around $300-$1,000 separately for a home inspection and appraisal, depending on local rates.
Tip: Come up with a larger down payment:
The more you can contribute upfront, the less you need to borrow. Your down payment doesn’t all have to come from your own savings, either. If you have a family member or close friend who can afford to, they might give you a gift to add to your down payment. They will need to sign a letter stating that the money is a true gift — not a loan that you’ll need to pay back.
Closing costs are based on the loan amount rather than the whole home. So the larger the down payment, the less closing costs you pay!
Pro Tip: Down payment assistance is also a helpful tool that most people don’t know they qualify for! – learn more about down payment assistance
3. Be Prepared for Property Taxes
Property taxes vary based on location and property value. Some states charge no property tax at all, while others can have very high property taxes.
For instance, single-family home taxes in New Jersey averaged $9,527, while in West Virginia, the average was $928 (2022 US Census Data). Keep these in mind as they impact your monthly payment.
Tip: Lower Property Taxes by Considering Other Locations
You might have your heart set on a certain neighborhood or a certain city, but flexibility is key. If you can cast a wider net, you will open yourself up to places where property taxes, and even home prices are lower.
4. Budget for Ongoing Repair and Maintenance Costs
Homeownership means taking care of your property’s upkeep. If you’re considering a fixer-upper, research the probably and leave room for unexpected costs, as these can add up quickly. Even new homes require upkeep both inside and out.
5. Shop Around for Homeowners Insurance
Insurance is essential to protect your investment, and premiums vary based on location, coverage, and risk factors. They are especially high in states prone to natural disasters, like Florida and California. Get multiple quotes to find the best rate as this is the one area you can control in your monthly payment.
6. How Do Current Mortgage Rates Impact Affordability?
Interest rates are determined by many different factors, but the effect they have on your monthly mortgage payment is simple. The higher your interest rate, the higher your monthly payment. For instance, a 30-year $600,000 mortgage would be $3,220 at a 5% rate, but would increase to $4,402 at 8%.
Tip: Talk with us about today’s rates and how they affect your monthly budget.
7. How Does Credit Score Impact Affordability?
Your credit score is the foundation of your finances, and it plays a critical role in determining your mortgage rate. For example, let’s say you have a credit score of 750, considered in the “very good” range by FICO. That will put you in the running for a better rate than, say, a lower credit score of 580, which is at the top of the “poor” credit range. To find out your score, check your credit report at one of the big three agencies: Equifax, Experian and TransUnion.
Tip: How to Improve Your Credit Score
Boosting your credit score is a great way to put yourself in a position for the lowest mortgage rate possible. ALWAYS make your payments on time and in full every month. Pay down your credit cards and avoid applying for any additional accounts as you prepare to apply for a mortgage.
Related Topic: Prevent Annoying Credit Offers before starting the mortgage process – Opt out at www.optoutprescreen.com
The Bottom Line:
Should I Buy a Home Now or Wait?
Home prices have been on a rollercoaster ride in recent years and are still very high, as are mortgage rates. It’s enough to make you wonder whether now is even a good time to buy a house. It’s important to focus on your personal situation rather than thinking about the overall real estate market. Is your credit score in great shape, and is your overall debt load manageable? Do you have enough savings that a down payment won’t drain your bank account to zero? If your personal finances are in excellent condition, a lender will likely be able to give you the best deal possible on your interest rate.
It’s not just about money, though. Think about what’s on the horizon for you. Are you comfortable planting roots for the foreseeable future? The longer you can stay in a home, the easier it is to justify the expenses of closing costs and moving all your belongings — and the more equity you’ll be able to build.
With careful planning and the right support, homeownership can be a powerful step toward building financial security. Reach out today to discuss your options, learn about our loan programs, and take the first step toward making your dream home a reality.
Frequently Asked Questions About Home Affordability
How Much House Can I Afford on a 75K Salary?
Let’s say you earn $75,000 each year, which is $8,333 per month before taxes and deductions. By using the 28 percent rule, your full mortgage payments should add up to no more than 28 percent of $8,333, or $1,750 per month (including mortgage, insurance, and taxes). – This is assuming no other debts and doesn’t consider your other monthly obligations and budget.
How Much House Can I Afford with an FHA Loan?
Federal Housing Agency (FHA) mortgages are available to homebuyers with credit scores of 500 or more and can help you get into a home with less money down. If your credit score is below 580, you’ll need to put down 10 percent of the purchase price. If your score is 580 or higher, you could put down as little as 3.5 percent. There are limits on FHA loans, though. In most areas in 2024, an FHA loan cannot exceed $498,257 for a single-family home. In higher-priced areas, the number can go as high as $1,149,825. You’ll also need to factor in how mortgage insurance premiums (MIP) — required on all FHA loans — will impact your payments.
How Much House Can I Afford with a VA Loan?
Eligible active duty or retired service members, or their spouses, might qualify for down payment–free mortgages from the U.S. Department of Veterans Affairs. These loans have competitive mortgage rates, and they don’t require PMI, even if you put less than 20 percent down. Plus, there is no limit on the amount you can borrow if you’re a first-time homebuyer with full entitlement. You’ll need to also consider how the VA funding fee will add to the cost of your loan.
How Much House Can I Afford with a USDA Loan?
Loans backed by the United States Department of Agriculture (USDA) require no down payment, and there is no limit on the purchase price. However, these loans are geared toward buyers who fit the low- or moderate-income classification, and the home you buy must be within a USDA-approved rural area.
Ready to see what you can afford? Contact us today to discuss your home-buying goals and take your first step toward financial freedom.
Refinancing an existing loan may result in the total finance charges being higher over the life of the loan.
These blogs are for informational purposes only. Make sure you understand the features associated with the loan program you choose, and that it meets your unique financial needs. Subject to Debt-to-Income and Underwriting requirements. This is not a credit decision or a commitment to lend. Eligibility is subject to completion of an application and verification of home ownership, occupancy, title, income, employment, credit, home value, collateral, and underwriting requirements. Not all programs are available in all areas. Offers may vary and are subject to change at any time without notice. Should you have any questions about the information provided, please contact us.