How Much House Can I Afford

How Much House Can I Afford?

It’s easy to get caught up in looking at beautiful listings online and binging episodes of House Hunters. But before you get too deep into a home fantasy, answer one crucial question: how much house can you afford? There isn’t one answer, but if you look at some of these factors, you’ll have a better estimate of the price you can pay for your home without becoming financially strapped.

Getting a Complete Look of Your Finances is Important

First, take a comprehensive look at your financial situation. Your household income obviously plays a prominent role in determining how much house you can afford, but so does the amount of debt you have and the monthly payments you’re making to pay it off. Down payment size will also impact the amount of house you can afford. With a larger down payment (20% or more), your interest rate will be lower and you won’t have to add in paying PMI or MIP.

Other factors include any cash reserves you have and the funds available for closing costs. Any major monthly expenses, such as a large car payment, will decrease the amount of house you can afford. Your credit also plays an important role. The better your score, the better interest rates lenders can offer, and the more house you will likely be able to pay for.

The Type of Loan Matters

You may not be aware that the amount of house you can afford will depend on the type of mortgage you will use to finance it. For example, with an FHA loan, you may be able to make a down payment that’s as low as 3.5%. If you’re a veteran, an active member of the military, or a widowed spouse of a service member, you may qualify for a VA loan. This option allows you to buy a home without any down payment at all in some instances.

Think 28/36

You may have heard of the 28/36 rule, which measures how much house you can afford. The idea is that you should spend no more than 28% of your monthly income (before taxes) on your mortgage and all your home-related expenses. Property taxes and homeowner’s insurance are included in that 28%. On the other hand, 36 represents the percentage of your pre-tax income that you should use to pay off debt. This includes your mortgage, student loans, credit card debt, etc.

With a little math, you can use this rule to estimate your mortgage payments. A mortgage calculator crunches the numbers for you and can factor in taxes and insurance. However, everyone’s financial situation is unique. While the 28/36 rule is a good guideline, it’s not the only way to think about your mortgage.

If All Else Fails, Consult an Expert

Although these are some good indicators, there’s nothing like talking to an experienced lender about your finances. We know how uncomfortable talking to a stranger about your finances can be, but honest and expert feedback is necessary when buying a home! Let us connect you with a lender that can help you answer the important “How much house can I afford?” question. Get one step closer to your dream home!

Updated April 2024