To determine how much home you can afford, several key factors are considered:
- Income and Debts: Your gross annual or monthly income and recurring monthly debts (like car payments, student loans, credit card minimum payments) are primary inputs. Lenders use these to calculate your debt-to-income (DTI) ratio, which helps assess affordability
- Down Payment: The amount of cash you can put down upfront affects the loan size you need and your monthly payments
- Interest Rate: The mortgage interest rate impacts your monthly payment; lower rates increase affordability
- Additional Costs: Property taxes, homeowners insurance, and possibly HOA dues add to monthly housing expenses and should be included in affordability calculations
- DTI Guidelines:
- Conventional loans typically use a 36% limit on housing expenses (including mortgage, taxes, insurance) relative to gross income, and a 43% limit on total monthly debts including the mortgage
* FHA loans often use a 31% housing expense and 43% total debt limit, with more flexible down payment and credit score requirements
- Other Expenses: Regular non-debt expenses (childcare, groceries, savings goals) should be considered as they affect your budget beyond what lenders calculate
Example Calculation:
If your monthly gross income is $3,000:
- Maximum housing payment (36% rule) = $1,080
- Maximum total debt payments (43% rule) = $1,290
This means your mortgage plus taxes and insurance should not exceed $1,080, and your total debts including mortgage should be under $1,290
Tools to Use:
Online calculators from Zillow, NerdWallet, Wells Fargo, and others can help
you input your income, debts, down payment, and other details to estimate how
much house you can afford
. Summary:
You can afford a home where your monthly mortgage payment plus taxes and
insurance is about 28-36% of your gross monthly income, and your total monthly
debt payments stay below 43% of your income. Your down payment, credit score,
and interest rate will further influence the exact amount
