How Much House Can I Afford?

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With so much economic uncertainty, it’s understandable if you’re hesitant about moving or making your first home purchase. It’s a big commitment, but you can assess your homebuying budget without committing to anything by using our home affordability calculator. 

Once you get an idea of how much home you can afford, you can decide if you’re ready to take the next steps to becoming a homeowner. Or you can start preparing to purchase a home in the future by strengthening your credit or saving for a bigger down payment. 

Across the U.S., housing inventory remains low. So buyers are increasingly being forced into bidding wars with each other and housing prices are on the rise. This has created difficulties for many first-time buyers, who are struggling to get their offers accepted because they often rely on government-backed loans and down payment assistance programs.

As a chunk of homebuyers are being forced to the sidelines, now’s a great time to be proactive with your home buying budget. 

Using Our Affordability Calculator

To get the most out of our home affordability calculator, you’ll need to make sure you’re entering the most accurate information. 

Here’s what you need to enter in each box.

Annual income: Enter the amount you make each year before taxes. If you’re purchasing the house with a partner or spouse, this should be your total annual combined household income.

Down payment: Enter the amount you plan to pay for a down payment. If you qualify for down payment assistance (DPA), you can include that amount here only if it’s money you won’t need to pay back or make monthly payments on. Also, down payment assistance programs typically have a lot of stipulations you, or a home, may need to meet in order to qualify. And this calculator doesn’t take those extra restrictions into account.

Monthly debt: Enter your total recurring debt payment payments. This includes car payments, student loan payments, and credit card bills. But don’t add other expenses that you pay in full each month, like car insurance or utilities.

Loan term: Your loan term is the length of time you’ll be repaying the loan. Common loan terms are 30 years and 15 years.

Interest rate: Enter your mortgage interest rate here.

Property taxes: Enter the percentage of your home’s value you expect to pay each year in property taxes. This can be a difficult number to get if you don’t know exactly where you plan on living because property taxes vary by location. Your property taxes are also typically based on the homes assessed value, which often is different than the purchase price. Property taxes can also increase after you move in depending on when or how often the home’s value is reassessed.

Insurance: Enter an estimate of what you expect your homeowners insurance to cost. If you live in an area that’s prone to floods, fires or earthquakes, you may want to get a quote before going house shopping. Insurance in these areas is typically much higher and has a bigger impact on your home buying budget.

HOA: If you’re looking at purchasing a property that is part of a homeowners association, then include those fees here
Other: If there are any annual or monthly fees that you haven’t included, enter them here.

Why Having a Budget Is Important

Only once you have a sense of your overall budget — how much you have coming, going out, and in savings — can you consider what you might spend on a new home purchase. 

“The best advice I give is to buy a home you can afford,” says Eric Chen, a financial consultant and associate professor of business administration at the University of St. Joseph. “But you’re not going to know what you can afford until you budget.”

Pro Tip

When you’re calculating your home-buying budget, leave room for unexpected expenses. The most expensive home you can afford isn’t necessarily the one you should buy.

How Much House Can I Afford?

Your bank or mortgage lender can help you estimate how much your new home purchase will cost in terms of monthly payments, ongoing expenses like private mortgage insurance, and up-front fees such as closing costs. You can get ahead of the process by using a mortgage payment calculator. Be sure to have your income, estimated down payment, and other financial information ready to go. 

Note that the number you’re approved to spend by your lender is the maximum you should consider paying for a home. You’re probably better off shooting for an amount below the maximum. “I always recommend people try to avoid buying right at the high end of their budget,” says David Pipp, who runs the family financial website Living Low Key. “You don’t want to be strapped for cash and have an emergency come up you can’t pay for.”

Molly Ford-Coates, an accredited financial counselor and the founder and CEO of Ford Financial Management, also recommends a conservative approach. “I tell people their housing expenses shouldn’t exceed more than 25% of their gross monthly income, and their total mortgage should not exceed more than two to two and a half times their annual income.”

In the end, the answer to the question “how much mortgage can I afford?” is a personal one. If you’ve done the necessary homework to ensure you’re not getting in over your head and have enough money in reserve for emergencies, you can come up with a reasonable number for what percentage of your income should go to housing.

Interest Rate Impact on Your Budget

Your interest rate plays a bigger role in your payment than may you realize. Consider this example, using our mortgage calculator

Payment DetailsPayment Amounts
House price$300,000
Down payment$60,000 (20% of the purchase price) 
Loan period30-year fixed rate
Your monthly payment at 2.500%$1,241
Your monthly payment at 5.000%$1,581
Savings per month with lower interest$340

Imagine being able to put away an extra $340 in savings each month, which would yield you savings of more than $4,000 annually. For this reason, it pays to shop around for the best interest rates

To see exactly how different interest rates will impact how much house you can afford, you can use our mortgage payment calculator.

How Debt-to-Income Ratio Impacts Your Budget

How much you can borrow to buy a home depends on your income and credit score, as well as your debt-to-income ratio (DTI). This is calculated by taking all of your monthly debt payments and dividing that by your monthly pre-tax income.

Your DTI usually includes bills like student loans, car payments, and credit card debt, but it doesn’t include living expenses such as food, gas, and utilities. While the maximum DTI varies by lender and mortgage type, most lenders require a DTI of 36% or lower.

For example, if you have a pre-tax monthly income of $4,000, 36% of that would be $1,440. So your total debt payments and future mortgage payment couldn’t exceed that amount. But just because a bank is okay with letting you borrow up to a 36% DTI, or more, that doesn’t mean you should.

The 28/36 Rule for Affordability

A quick and easy way to determine how much you can afford to spend on housing is the 28/36 rule. “This means your monthly mortgage payment should be no more than 28% of your pre-tax income, and your total debts should be no more than 36% of your total pre-tax income,” says Austin Weyenberg, founder of the personal finance blog The Logic of Money.

So if you earn $5,000 a month before taxes, then your monthly mortgage payment shouldn’t exceed $1,400. Keep in mind that your monthly payment calculation should include property taxes and homeowners insurance. 

In this scenario, you could also have up to $400 in other monthly debt payments, such as student loans or car payments, and still be under 36% in total debts. This is why paying off your other debt is a great way to increase the flexibility of your home buying budget.

Low Down Payment Mortgage Options

One of the biggest barriers to homeownership is the upfront costs, including the closing costs and down payment. Typically, the down payment is the biggest out-of-pocket expense. For a conventional mortgage it can be as high as 10% to 20% of the purchase price.

However, there are government-secured loans that are less risky for lenders and therefore have small down-payment requirements. These mortgages also typically have less strict lending guidelines and can be easier to qualify for.

FHA Loans

Mortgages backed by the Federal Housing Administration (FHA) require as little as 3.5% down. That can save you tens of thousands of dollars in upfront costs.

But FHA loans require that you have mortgage insurance throughout the life of the loan if you have a down payment of less than 10%. This costs .45% to 1.05% of the loan amount annually. That’s in addition to an upfront insurance premium payment of 1.75% of the mortgage amount, regardless of your down payment amount. With conventional loans, you can waive the mortgage insurance requirement once you have 20% equity in your home.

FHA loans are more accessible, but they can be more expensive in the long run.

VA Loans

If you have qualifying military service, you may be eligible for a mortgage backed by the U.S. Department of Veterans Affairs, also known as a VA loan. This loan type has no minimum down payment requirement, so you can borrow up to 100% of your future home’s purchase price.

However, VA loans do have a unique upfront funding fee of 1.4% to 3.6% of the purchase price. And with no down payment being required, your funding fee may end up being closer to 3.6%. That can be a significant out-of-pocket cost — but you may be able to roll the funding fee into your loan. In that case, you’re even allowed to borrow more than 100% of your home’s value. 

The question at that point becomes whether or not it’s the right financial move for you to borrow more than what your home is worth.

Factors That Affect What Home You Can Afford

Your homebuying budget will be influenced by a number of factors. Understanding each of these will help you adjust and make the most of your housing budget.

You should pay attention to the following:

  • Income
  • Other debt (student loans, car payment, credit cards, etc.)
  • Mortgage rate
  • Type of mortgage loan
  • Down payment
  • Homeowners insurance
  • Property taxes
  • Real estate market

The Final Word

Know the elements that go into your mortgage payment and what you can save by shopping for better interest rates

Be realistic: All our experts suggest you shop below the maximum amount you can qualify for. Consider your lifestyle, your existing debts, and current and potential income when shopping for homes. If you buy a home taking every penny of your disposable income, you may be caught short in an emergency.

Continue Buying a Home Guide Series