Last updated on September 22, 2023
|🏠 How to Calculate Affordability|
|Step 1: Customize Payment Details|
|Step 2: Use Helpful Suggestions|
|Step 3: Calculate Based on Annual Income, Monthly Debts, and Down Payment Amount|
|Step 4: Calculate Based on Estimated Monthly Payments and Down Payment Amount|
|Step 5: Apply Advanced Filters|
|Step 6: Understand Line Items in the Calculator|
What you'll learn:
➤ Calculating How Much House You Can Afford
When figuring out how much mortgage payment you can comfortably manage, we consider key factors like your household income, ongoing monthly debts (such as car loans and student loan payments), and the funds you have saved for a down payment.
As a prospective homeowner, it’s important to feel confident about your monthly mortgage costs.
While your household income and regular monthly debts provide a reliable foundation, unforeseen expenses and unplanned expenditures could affect your savings.
A helpful rule of thumb is to maintain a reserve equivalent to three months’ worth of payments, encompassing your housing expenses and other monthly debts. This cushion ensures you’re prepared to handle your mortgage payment, even in the face of unexpected circumstances.
Impact of Debt-to-Income Ratio on Affordability
Your debt-to-income (DTI) ratio is a crucial gauge that your mortgage lender considers when calculating your borrowing capacity. It involves comparing your total monthly debts, including mortgage payments, insurance, and property taxes, against your monthly pre-tax income.
Based on your credit score, you might qualify for a higher ratio. However, as a general guideline, housing costs should not surpass 28% of your monthly earnings.
For instance, if your monthly mortgage payment, alongside taxes and insurance, stands at $1,260, and your monthly income before taxes is $4,500, your DTI ratio is 28%. (1260 / 4500 = 0.28)
You can also work the equation in reverse to determine your appropriate housing budget. Multiply your income by 0.28. In the provided example, this indicates a suitable mortgage payment of $1,260 to maintain a 28% DTI. (4500 X 0.28 = 1,260)
Affording a Home with an FHA Loan
When estimating your affordable house range, we’ve assumed that a 20% down payment suits you well, suggesting a conventional loan. However, if you’re thinking of a smaller down payment, even as low as 3.5%, an FHA loan could be an option.
FHA-backed loans offer more lenient qualifying criteria and could be especially beneficial if you have a lower credit score. For a deeper dive into FHA loan possibilities, check out our FHA mortgage calculator.
Conventional loans can allow down payments as low as 3%, although the qualification process can be a tad stricter compared to FHA loans.
The 28/36 Rule Explained
A useful guideline for calculating “how much house can I afford” is the 28/36 rule. This rule suggests allocating a maximum of 28% of your gross (pre-tax) monthly income to home-related expenses and capping total debts, which include your mortgage, credit cards, and other loans like auto and student loans, at 36% of your income.
For instance, if your monthly income is $5,500 and your existing debt payments are $500, your monthly mortgage payment should not surpass $1,480.
While the 28/36 rule offers a sensible starting point to determine home affordability, it’s crucial to consider your overall financial situation before deciding on your affordable house range.
Affordability with a VA Loan
If you have a military connection, a VA loan might be within reach. This is significant because loans supported by the Department of Veterans Affairs usually don’t necessitate a down payment.
Our Home Affordability Calculator factors in this substantial benefit while determining your individual affordability considerations.
When using the calculator, be sure to indicate ‘Yes’ under ‘Loan details’ in the ‘Are you a veteran?’ section.
Determining Your Affordable Home Range
Several key factors play a role in calculating “how much house can I afford?”
- Monthly Income: This encompasses your consistent earnings, whether from a salary or investments. It forms the foundation for determining your monthly payment capacity.
- Cash Reserves: The money you have available to manage a down payment and cover closing expenses. Savings, investments, and other sources contribute to this.
- Debt and Expenses: Your recurring financial commitments like credit card payments, auto loans, student loans, and essential expenses like groceries, utilities, and insurance.
- Credit Profile: Both your credit score and existing debt influence how lenders perceive your borrowing potential. These aspects impact the amount you can borrow and the mortgage interest rate you’ll qualify for.
Considering these factors holistically will guide you in pinpointing a suitable home within your financial means.
➤ Determining Your House Budget
The home affordability calculator offers an appropriate price range based on your inputs. Crucially, it considers your monthly commitments to assess whether a home falls within your feasible financial scope.
When lenders assess your home affordability, they consider your existing outstanding debts alone. They don’t consider factors like dedicating $250 monthly to retirement savings or preparing for upcoming expenses, such as welcoming a new baby.
By allowing you to adjust inputs and visualize different scenarios, Our Home Affordability Calculator clarifies how a mortgage commitment impacts your finances and savings.
Calculating Affordability Based on Salary
Curious about house affordability on a $40,000, $60,000, $100,000, or higher household income? Use our mortgage income calculator to explore various situations.
By entering a home price, expected down payment, and an assumed mortgage rate, you can gauge the necessary monthly or yearly income. The calculator even indicates how much a lender might approve you to borrow.
Additionally, the calculator addresses the inverse question: What income is required to purchase a $300,000 or $400,000 house?
This tool empowers you to grasp your current home-buying potential or the potential you aspire to achieve.
The Core of Home Affordability: Mortgage Rate
An essential aspect of any home affordability calculation is the estimated mortgage interest rate. Lenders assess your qualification for a loan based on:
- Debt-to-Income Ratio.
- Payment history.
- Proof of stable income.
- Down payment and additional reserves for closing costs and relocation expenses.
After confirming your eligibility, lenders determine your loan’s price, including the interest rate. Your credit score significantly influences the rate you secure.
Naturally, a lower interest rate translates to a reduced monthly payment.
➤ Key Aspects for Calculating Affordability
|Key Aspects for Calculating Affordability|
|🌟 Annual Income – Total earnings before taxes and deductions. Combine co-borrower incomes.|
|💸 Total Monthly Debts – Recurring expenses like car payments, credit card bills, or student loans. Adjust in our calculator.|
|🏠 Down Payment – Initial upfront investment to buy a home. Opt for a 20% down payment for lower costs and no PMI.|
|💼 Debt-to-Income Ratio (DTI) – Divide monthly debt payments by gross income to assess repayment capacity. Our calculator defaults to 36%.|
|💰 Interest Rate – Lender charges expressed as an annual percentage. Varies by credit score and down payment.|
|⏳ Loan Term – Agree on duration for repayment. Most common is 30 years. Edit in advanced options.|
|🏦 Property Tax – Annual tax based on property value. Varies by location. Edit in advanced options.|
|🛡️ Homeowner’s Insurance (HOI) – Essential coverage for home loans. Cost varies by coverage and location.|
|🔒 Private Mortgage Insurance (PMI) – Often required for <20% down payments. Shields lender from default.|
|🏘️ Homeowner’s Association (HOA) Dues – Common in some communities, impacts affordability. Edit in advanced options.|