To determine what home you can afford, you need to consider several key financial factors including your income, monthly debts, down payment, credit score, and current mortgage rates. Here are the main points to guide you:
Key Factors in Affordability
- Income and Debt-to-Income Ratio (DTI):
Lenders typically use a DTI ratio to decide how much mortgage you qualify for. The common guideline is that your monthly mortgage payment (including principal, interest, taxes, and insurance) should be no more than 28-36% of your gross monthly income. Your total monthly debts (mortgage plus other debts like car loans, student loans, credit cards) should not exceed 36-43% of your gross income
- Down Payment and Credit Score:
The size of your down payment affects affordability. FHA loans allow down payments as low as 3.5% if your credit score is 580 or higher, or 10% if lower, but may come with higher interest rates and mortgage insurance costs
- Mortgage Rates and Loan Terms:
Your interest rate and loan length (commonly 30 years) impact monthly payments. Lower rates mean you can afford a higher-priced home for the same monthly payment
- Other Expenses:
Property taxes, homeowners insurance, and possibly HOA fees add to monthly costs and affect affordability
General Rules of Thumb
- The 28/36 rule suggests spending no more than 28% of your gross income on housing and 36% on total debt
- The 36/43 rule is a slightly more flexible ratio lenders use, allowing up to 36% for mortgage costs and 43% for total debts
How to Calculate What You Can Afford
- Calculate 28-36% of your gross monthly income to estimate your maximum monthly mortgage payment.
- Subtract your other monthly debts to see what remains for housing.
- Use an online affordability calculator (like Zillow, NerdWallet, or Wells Fargo) to input your income, debts, down payment, and loan details to get an estimated home price you can afford
Example
If you earn $3,000 per month:
- Max mortgage payment = $3,000 x 0.36 = $1,080
- Max total debt payment = $3,000 x 0.43 = $1,290
- If you have $300 in other debts, you could afford a mortgage payment around $990 per month
Market Variations
Affordability varies by location due to differences in home prices and incomes. For example, Pittsburgh, PA, is among the most affordable markets, where typical homes cost around $208,583 and mortgage payments are about 24% of income
. By carefully assessing your income, debts, down payment, and using affordability calculators, you can estimate a realistic home price range that fits your financial situation.
