How Much House Can You Afford

It’s the most important question when thinking about buying a home: how much home can I afford? Fortunately, the answer is easy and not too difficult to find.

Below, we’ll walk you through how to get your answer.

How Much Income Do You Have? If you’re like the majority of home buyers, you will need a mortgage to purchase a home. Your income is one of the most important factors in determining how large of a mortgage you can be approved for. As a general rule, experts recommend keeping your housing payments to about 30% of your “gross” (pre-tax) income. As an example, if your salary is $60,000 per year, then your monthly gross income would be $5,000, meaning you should aim to spend $1,500 or less on your housing in a given month.

But that’s not the only factor to consider.

What is Your DTI? A lender will also look at your Debt-To-Income ratio (or DTI). This is a calculation that tells the lender how much of your income goes to debt payments each month.

Here’s how to calculate your own DTI: Add up all your monthly debt payments (mortgage, student loan, auto loan, credit card, etc.) and divide the total by your income.

For example, if you have a monthly income of $5,000 and a mortgage payment of $1,500, plus a $300 car payment and a $200 credit card payment, then your total debt payments would be $2,000. Since $2,000 divided by $5,000 is 40%, your DTI ratio in that example would be 40%.

Lenders generally prefer a DTI of 43% or lower when evaluating your mortgage application.

How Much of a Down Payment Do You Have? The second most important factor – after your income – in determining how much home you can afford is your down payment. In other words, how much money do you have saved up to put into the home? If you have saved up $40,000 and are ready to invest it in your new home, then you have a $40,000 down payment.

In general, it’s best to have at least a 20% down payment, although you can buy a home with less. The size of your down payment, along with your income and DTI ratio, will determine how big of a loan you qualify for.

Calculate How Much Home You Can Afford It’s always a good idea to use a mortgage calculator to better understand how much you can afford to pay for a home.

These calculators will help you see how much your total monthly payment will be, including principal and interest payments, property taxes, and mortgage insurance (if applicable).

Other Costs You should also keep in mind that there will be other costs in addition to your mortgage: Closing costs: You will usually need to pay between 2-5% of the price of the home in closing costs. Repairs and remodeling: Many home buyers choose to do some remodeling on their new home to make it fit their needs and tastes. In addition, the home may need various repairs in the first year and beyond you may want to purchase a home warranty as well.

You will definitely want to account for these costs when deciding how much you can afford to spend on a new home.

Anticipating all of these costs will help you avoid coming up short or feeling that your finances are too squeezed after purchasing the home.

Want to see what US News & World Report has to say about Home Affordability? Don’t let us do all the talking! Click here to take a look