For most homebuyers, it is less about how much house I can afford and more about how much mortgage I can afford, since few homebuyers are able to buy their homes with cash outright, so mortgages are going to be a major factor determining what home you can afford. While every mortgage lender holds their own criteria for what qualifies for an affordable mortgage, your ability to buy a house (and the size and terms of the loan you are offered) will always be determined mostly by the following factors. How much house you can afford is also dependent on what interest rate you receive, as a lower interest rate could dramatically reduce your monthly mortgage payments.
To figure out how much home you can afford, use the 25% rule: Never spend more than 25% of your monthly take-home pay (after taxes) on your monthly mortgage payments. If you can afford a 15-year mortgage instead of a 30-year mortgage, the monthly payments will be higher, but the total cost will be dramatically lower, since you will not pay nearly as much interest. Your monthly payments will be higher with a 15-year term, but you will pay down the mortgage in half as long as with a 30-year term–and save tens of thousands of dollars in interest.
Take a portion of that extra cash and direct it each month to the mortgage principal, so that you will be paying down your loan more quickly. Let us say you are paying $1,200 per month mentioned above, along with another $500 of debt from car payments and student loans. For instance, if you plug in the $211,238 mortgage amount, with 20% down, and an interest rate of 4%, you would see your monthly home payment rise to $1,515 once you add $194 in taxes and $71 for insurance. If you purchase a house worth $200,000 with a 15-year fixed-rate mortgage at 3.90%, your monthly payment is $1,469.37 (not including taxes and insurance).
For instance, if a potential homebuyer could afford to put 10% down on a $100,000 house, then their down payment is $10,000, meaning that homeowner would have to finance $90,00. In the U.S., the ideal down payment for a house is 20%, but typically, people will put down somewhere between 5 percent to 20% depending on their loan.
A mortgage affordability calculator, or a how much home I can afford calculator, can help buyers figure out how these costs would add up to their monthly payments, and then factor them into their decision of how much they can afford to borrow. Once you input all of your information, depending on which method you chose, our house affordability calculator will tell you what is the maximum you can afford to pay for your house, along with an estimated monthly payment. To get a sense of confidence in buying a house that you can afford, plug in your monthly income to our calculator and immediately receive a list of house prices that are within reach.
You can calculate affordability by annual income, monthly debt, and down payment, or by estimated monthly payments and a down payment. Your housing budget will be determined partly by the length of your mortgage, so besides doing a precise calculation of your existing expenses, it is important to have a precise view of the length of your loan, and to shop around among multiple lenders to find the best deal. While your personal savings goals or spending habits may affect your affordability, getting pre-qualified for a home loan can help you establish a reasonable housing budget.
Getting pre-approved for a loan can help you figure out what you are eligible for. For borrowers, it is good to eliminate as much existing debt as you can in order to qualify for the mortgage, and also in order to free up space to pay the mortgage. The last thing you want to do is go for a 30-year mortgage that is too expensive for your budget, even if you are able to find a lender who will underwrite a mortgage.
You do not want to end up with a mortgage that you cannot afford, so it is important to be realistic about your monthly income and expected expenses, and leave a little cushion in your budget for emergencies or unexpected expenses that may come up. It is important to be realistic about your monthly income and expected expenses, so that you do not end up with a mortgage loan that you cannot repay over the long term. When considering what homebuyers can afford, it is important for buyers to think about the long-term costs, not just the upfront cash cost and the required monthly payments.
Many home buyers attempt to guesstimate what they can afford in a monthly house payment using existing rental payments or an overly simplistic online home mortgage calculator. Mortgage lenders also take into account your personal financial situation, including how your monthly mortgage payments would add up to your total debt, and how much income you are expected to earn as you are paying off the house. Two criteria mortgage lenders look at to figure out how much you can afford are the home-mortgage-to-income ratio, known as the front-end ratio, and the overall debt-to-income ratio, known as the back-end ratio.
Most financial advisers agree that people should spend no more than 28% of their total monthly income on housing expenses, and no more than 36% on total debt – this includes housing, but also includes things like student loans, car expenses, and credit card payments. Lenders typically use the 28/36 rule as a sign of healthy DTI: That means that you would spend no more than 28 percent of your gross monthly income on your mortgage payments, and no more than 36 percent on your total debt payments (including your mortgage, student loans, car loans, and credit card debt). Not only does going over and above help you qualify for more loan programs, it also makes sure that mortgage payments are affordable given your income.
If you repay the mortgage balance over a shorter period, you will likely pay less in overall interest than with a longer-term mortgage. While it is true that a larger down payment may make you more attractive as a homebuyer and a borrower, you can probably buy a new house with much less money in hand.