How Much House Can I Afford? Bankrate New House Calculator Caret RightMain Menu Mortgage Mortgages Financing a home purchase Refinancing your existing loan Finding the right lender Additional Resources Elevate your Bankrate experience Get insider access to our best financial tools and content Caret RightMain Menu Bank Banking Compare Accounts Use calculators Get advice Bank reviews Elevate your Bankrate experience Get insider access to our best financial tools and content Caret RightMain Menu Credit Card Credit cards Compare by category Compare by credit needed Compare by issuer Get advice Looking for the perfect credit card? Narrow your search with CardMatch Caret RightMain Menu Loan Loans Personal Loans Student Loans Auto Loans Loan calculators Elevate your Bankrate experience Get insider access to our best financial tools and content Caret RightMain Menu Invest Investing Best of Brokerages and robo-advisors Learn the basics Additional resources Elevate your Bankrate experience Get insider access to our best financial tools and content Caret RightMain Menu Home Equity Home equity Get the best rates Lender reviews Use calculators Knowledge base Elevate your Bankrate experience Get insider access to our best financial tools and content Caret RightMain Menu Loan Home Improvement Real estate Selling a home Buying a home Finding the right agent Additional resources Elevate your Bankrate experience Get insider access to our best financial tools and content Caret RightMain Menu Insurance Insurance Car insurance Homeowners insurance Other insurance Company reviews Elevate your Bankrate experience Get insider access to our best financial tools and content Caret RightMain Menu Retirement Retirement Retirement plans & accounts Learn the basics Retirement calculators Additional resources Elevate your Bankrate experience Get insider access to our best financial tools and content
How Much House Can I Afford
Written by Edited by A house is one of the biggest purchases you can make, so figuring out how much you can afford is a key step in the . You'll need to start by weighing how much money you have coming in - your monthly earnings from your job, investments and any other streams of income - versus how much you have going out to cover costs like student loans, credit card balances and car payments. Calculator Start by crunching the numbers
Figure out how much you (and your partner or co-borrower, if applicable) earn each month. Include all your revenue streams, from alimony to investment profits to rental earnings. Next, list your estimated housing costs and your total . Include annual property tax, costs, estimated and the loan terms (or how long you want to pay off your mortgage). The popular choice is , but some borrowers opt for shorter loan terms. Lastly, tally up your expenses. This is all the money that goes out on a monthly basis. Be accurate about how much you spend because this is a big factor in how much you can reasonably afford to spend on a house. Input these numbers into our Home Affordability Calculator to get a clear idea of your homebuying budget. Why it s smart to follow the 28 36% rule
Most financial advisors agree that people should spend no more than , and no more than 36 percent on total debt. The 28/36 percent rule is a tried-and-true home affordability rule of thumb that establishes a baseline for what you can afford to pay every month. For example, let's say you earn $4,000 each month. That means your mortgage payment should be a maximum of $1,120 (28 percent of $4,000), and your other debts should add up to no more than $1,440 each month (36 percent of $4,000). What do you do with what's left? You'll need to determine a budget that allows you to pay for essentials like food and transportation, wants like entertainment and dining out, and savings goals like retirement. How much mortgage payment can I afford
As you think about your mortgage payments, it's important to understand the difference between what you can spend versus what you can spend while still living comfortably and limiting your financial stress. For example, let's say that you could technically afford to spend $4,000 each month on a mortgage payment. If you only have $500 remaining after covering your other expenses, you're likely stretching yourself too thin. Remember that there are other major to consider, too, and you want to live within your means. Just because a lender offers you a preapproval for a large amount of money, that doesn't mean you should spend that much for your home.. How to determine how much house you can afford
Your housing budget will be determined partly by the terms of your mortgage, so in addition to doing an accurate calculation of your existing expenses, it's important to get an accurate picture of your loan terms and shop around to different lenders to find the best offer. Lenders tend to give the lowest rates to borrowers with the , lowest debt and . How does your 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 740, putting you in the running for a rate of 4.375 percent on a loan for a $400,000 property with a 20 percent down payment. If your credit score is lower - 640, for example - your rate could be higher than 6 percent. In that scenario, the monthly payment to cover the principal and interest could be $300 cheaper for the higher credit score. To find out your score, check your credit report at one of the big three agencies: Equifax, Experian and TransUnion. How does your debt-to-income ratio impact affordability
Lenders will also look at your debt-to-income ratio, or DTI, to get a clear picture of how risky it is to loan you money. Simply put, the higher your , the more the lender will doubt your ability to pay the loan back. Lenders have maximum DTIs in place that could stand in the way of getting approved for a mortgage. On conventional loans, for example, lenders usually like to see debt-to-income ratios under 43 percent, although in some cases, 50 percent is the cutoff. If you want to shrink your debt-to-income ratio before applying for a mortgage - which is a good idea - pay off your credit cards and other recurring debts like student loans and car payments. Here s how to figure out your DTI
Add up your total monthly debt and divide it by your gross monthly income, which is how much you brought home before taxes and deductions. Here's an example: Add up your monthly debt: $1,200 (rent) + $200 (car loan) + $150 (student loan) + $85 (credit card payments) = $1,635 total Now, divide your debt ($1,635) by your gross monthly income ($4,000): 1,635 ÷ 4,000 = .40875. By rounding up, your DTI is 41 percent. If you get rid of the $85 monthly credit card payment, for example, your DTI would drop to 39 percent. How much house can I afford on my salary
Let's say you earn $70,000 each year. By using the 28 percent rule, your mortgage payments should add up to no more than $19,600 for the year, which equals a monthly payment of $1,633. With that magic number in mind, you can afford a $305,000 home at a 5.35 percent interest rate over 30 years. But you'd need to make a down payment of 20 percent. How does the amount of my down payment impact how much house I can afford
The down payment is an essential component of affordability. For example, if we include down payment on that $70,000 annual salary, your home budget shrinks to $275,000 with a down payment of 10 percent (if you're aiming to keep the 28 percent rule intact). By making a larger down payment, you would reduce the , which makes a difference in how your lender looks at you in terms of risk. can help you explore how different purchase prices, interest rates and impact your monthly payments. And don't forget to think about the potential for mortgage insurance premiums to impact your budget. If you make a down payment of less than 20 percent on a conventional loan, you'll need to pay for private mortgage insurance, or . How does the type of home loan impact affordability
While it's true that a bigger down payment can make you a more attractive buyer and borrower, you might be able to get into a new home with a lot less than the typical 20 percent down. Some programs make mortgages available with as little as 3 percent or 3.5 percent down, and some VA loans are even available with no money down at all. How much house can I afford with an FHA loan
Federal Housing Agency 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 , though. In most areas in 2022, an FHA loan cannot exceed $420,680 for a single-family home. In higher-priced areas, the number can go as high as $970,800. You'll also need to factor in how mortgage insurance premiums - 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, can 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 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
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, so you will need to put a big emphasis on understanding how mortgage payments will impact your overall monthly budget. How does where I live impact how much house I can afford
Where you live plays a major role in what you can spend on a house. For example, you'd be able to buy a much bigger piece of property in St. Louis than you could for the same price in San Francisco. You should also think about the area's overall . If you live in a town where transportation and utility costs are relatively low, for example, you may be able to carve out some extra room in your budget for housing costs. I m a first-time homebuyer How much can I afford
Being a first-time homebuyer can be especially daunting: You're paying rent, so how can you manage to save money at the same time for a down payment? Data from the National Association of Realtors shows that adhering to the 28 percent rule is becoming especially challenging for first-time buyers: In the , the typical first-time buyer actually spent more than 28 percent of income on their mortgage payments. Fortunately, there are programs designed specifically for . Depending on where you live and how much you earn, you may be able to qualify for assistance with your down payment and/or closing costs. Tips for improving your home affordability
Before you start looking at real estate and shopping around for the right lender, it's important to take these steps to improve your chances of becoming a homeowner without breaking the bank. Work to improve your credit score: is the best way to put yourself in a position for the lowest mortgage rate possible. Pay down your credit cards and avoid applying for any additional accounts as you prepare to apply for a mortgage. Improve your debt-to-income ratio: Work to reduce your debts - by refinancing student loans to a lower interest rate, for example. You might also focus on making your income bigger by negotiating a pay raise at your current job or getting a second job for additional earnings. Either way, you will demonstrate to a lender that you have more money, which makes you less of a risk. Come up with a bigger 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 - not a loan that you'll need to pay back. Consider 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 home prices are lower. Figure out how much space you really need: Do you need a 3,500-square-foot home with a sprawling backyard? If this is your first time buying a piece of property, perhaps a is a better bet for your bank account. If you're years away from having a family, you can always start small, build up equity and sell to find a bigger home when you're ready. Additionally, consider looking at condos, which have a cheaper median price tag than single-family homes. What other factors impact home affordability
Be prepared for your property taxes: When you buy a home, you assume the tax liabilities that come with it. So, in addition to paying off your mortgage, you'll need to factor in the that cover your contribution for government services like a police department, firefighting services and public schools. That bill varies widely based on your property's valuation and where it's located. For example, the average property tax bill for a single-family home in New Jersey was more than $9,700 in 2021, while Alabama homeowners paid an average of just $905, according to Set aside an emergency fund for mortgage payments: Life happens - and sometimes, that means bad things happen. In addition to making your regular mortgage payments, you'll need to stash away money in case, for instance, you lose your job. Your emergency fund provides a layer of protection to protect yourself in a worst-case scenario. Budget for ongoing repairs and maintenance costs: When you're a renter, a plumbing problem is your landlord's responsibility. When you're an owner, it's yours. How much you'll need to spend depends on how old the home is, but even brand new construction will require continued investment for upkeep. Shop around for homeowners insurance: When you , you need to make sure it's protected in the event of a disaster. The average homeowner pays nearly $1,400 in premiums for $250,000 worth of dwelling coverage. Costs vary widely depending on what you need in your policy and where you live. Be sure to compare multiple quotes to get solid coverage at a decent price. Should I buy a home
With home prices hitting record highs, you might wonder whether now is even . It's important to focus on your personal situation instead of 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 on the loan and moving all your belongings - and the more equity you'll be able to build. Home affordability FAQs
Figuring out how much you can spend on a home comes down to a few key figures: How much money you earn, how much money you can contribute to a down payment and how much money you're spending each month on other debts. When you apply for a mortgage, a lender will scrutinize every aspect of your personal finances to assign a level of risk on whether you'll be able to pay the loan back. The more you can lower your debt-to-income ratio and increase the size of your down payment, the better.
In addition to your down payment, you will have to pay a range of when you buy a home, which include an appraisal, title insurance, an origination fee for the mortgage, real estate attorney fees and more. The total will vary depending on what your lender charges, whether you'll pay real estate transfer taxes and if the seller agrees to cover a portion of the fees. As you're budgeting for a home purchase, it's wise to plan for between 2 percent and 5 percent of the home's purchase price. So, if you're buying a $400,000 home, your closing costs might range between $8,000 and $20,000. Some lenders might give you the option to roll those costs into the loan to avoid paying for them out-of-pocket. Keep in mind, though, that you'll pay interest on them if you choose that option.
This answer isn't just about your income. Your interest rate and your plans for a down payment play an important role. For example, if you're planning to secure an FHA loan and put down 3.5 percent on a $400,000 home, you'll need to earn just over $102,000 per year for a 30-year mortgage with a 5 percent interest rate. If you're sitting on the money you need for a 20 percent down payment, your income needs look a lot different. For example, if you can put down $80,000 and lock in a 4.75 percent interest rate on a 30-year mortgage, you only need to earn $78,000 per year.
There are quite a few opportunities to get financial assistance with buying a home. If it's your first time - or if you haven't owned a home in the last three years - start by exploring the that cater to your state or city. There are also , many of which are tailored to help low- and moderate-income borrowers with money that does not have to be paid back. Additionally, you might be able to get assistance based on your line of work. For example, teachers and emergency service workers, like police officers and firefighters, can qualify for the program, which lets qualifying individuals buy HUD-approved properties for 50 percent off their purchase price. Bottom line Home affordability begins with these key factors
Don't let rising home prices automatically scare you away. Being able to purchase a property starts with these questions: Do you pay your bills on time? A history of no late payments will make you look good in the eyes of any lender. They'll know that they can expect to receive your mortgage payment each month when it's due. Do you have proof of steady income? If you have a steady job that deposits a similar amount into your checking account every two weeks, you're in good shape. Lenders will evaluate your bank accounts, review recent pay stubs and look at your tax forms. If you're self-employed or earn irregular income, you'll need to show even more evidence of your earnings - likely the past two years of tax returns. Do you have a low debt-to-income ratio? If you're earning a lot more money than you're paying back for other debt, you're in a good position. What's the best mortgage rate you can get? The lower your rate, the more you'll save on interest payments. The good news: If you answered yes to the previous three questions, you'll likely qualify for the lowest rates a lender can offer.