AFFORDABILITY calculator

FHA loans are one loan program designed to make homeownership more accessible. Backed by the Federal Housing Administration, they are especially helpful for first-time buyers or those with lower credit scores. Here’s how much house you can afford with an FHA loan:

• Lower Down Payment Requirements: FHA loans require a down payment as low as 3.5% of the purchase price. That can make it easier to afford a home. This lower initial cost allows you to keep more cash on hand for other expenses. However, a smaller down payment means a larger loan amount and higher monthly payments.
• Flexible Credit Score Criteria: FHA loans are more forgiving when it comes to credit scores. While conventional mortgage loans typically require a score of 620 or higher, FHA loans may be available to borrowers with scores as low as 580. This flexibility can make homeownership possible, though it might come with slightly higher interest rates and impact what you can afford.
• Debt-to-Income Ratio Considerations: The FHA typically allows for a higher debt-to-income (DTI) ratio than conventional loans, sometimes up to 50%. This means you might qualify for a larger mortgage amount even if you have existing debts. Still, run the numbers to ensure the payment is still within your comfort zone.
• Mortgage Insurance Requirements: FHA loans require annual mortgage insurance premiums (MIP) for the life of the loan if your down payment is less than 10%. This additional cost will be included in your monthly payment. Include that in your affordability calculations if you’ll be putting down less than this amount.
• Loan Limits: FHA loans have set limits based on the area where you’re buying. These limits can impact how much house you can afford, especially in high-cost areas. Be sure to check the FHA loan limits in your region to confirm the maximum loan amount.

Overall, an FHA loan can make homeownership more attainable, especially if you have a lower credit score or can only make a small down payment. Use ez Home Search’s affordability calculator to see how an FHA loan fits within your budget.

VA loans, offered through the Department of Veterans Affairs, provide a valuable home financing option for eligible veterans, active-duty service members, and some military spouses. Here’s how a VA loan impacts affordability:

• No Down Payment Requirement: One of the biggest advantages of a VA loan is the ability to purchase a home with no down payment. This means you can afford more home upfront without needing to save for a large down payment. Keep in mind a larger loan amount may increase your monthly payments.
• No Private Mortgage Insurance (PMI): Unlike conventional or FHA loans, VA loans do not require private mortgage insurance, even with no down payment. This can lower your monthly payments and increase your overall affordability.
• Lower Interest Rates: VA loans may offer lower interest rates compared to conventional mortgage loans. Less interest reduces your monthly mortgage cost and allows you to afford a more expensive home.
• Flexible Debt-to-Income Ratio: The VA doesn’t set a maximum debt-to-income (DTI) ratio, but most mortgage lenders prefer a DTI of 41% or lower. This flexibility can help you qualify for a larger mortgage. Remember to keep the monthly payment manageable within your overall budget.
• Funding Fee Consideration: VA loans typically require a one-time funding fee, which can be rolled into the loan amount. This fee varies based on factors like your service category and whether you’ve used a VA loan before. Remember to Include the funding fee in your loan when calculating mortgage affordability.
• Loan Limits and Entitlement: While there are no longer VA loan limits for borrowers with full entitlement, your ability to buy a home with a VA loan will depend on your lender’s criteria and your personal financial situation. Be sure to understand your entitlement and how it affects your purchasing power.

A VA loan offers significant benefits that can increase home affordability–especially the no down payment and no PMI. Use ez Home Search’s affordability calculator to explore how a VA loan can help you find a home that fits your budget and needs.

The 28/36 rule is a guideline used by lenders to determine how much of your current income should be allocated toward housing costs and total debt. According to this rule:

• 28% Rule: No more than 28% of your gross monthly income should go toward housing expenses. That includes your monthly mortgage payment, property taxes, and homeowners insurance.
• 36% Rule: No more than 36% of your gross monthly income should be spent on total debt obligations. It adds up your mortgage, car loans, student loans, credit card payments, and other monthly obligations.

This guideline checks that you’re not overextending yourself financially. It’s a way to see if you can sufficiently manage your mortgage payments alongside other financial responsibilities.

The amount of house you can afford depends on factors beyond your salary. Lenders typically recommend that your monthly housing costs (including mortgage payments, property taxes, and insurance) do not exceed 28% of your gross monthly income. To get a more personalized estimate:

• Calculate Your Monthly Income: Start with your gross monthly income before taxes and deductions.
• Apply the 28% Rule: Multiply your monthly income by 0.28 to get an estimate of the maximum housing costs to aim for.
• Consider Other Factors: Your down payment, debt-to-income ratio, credit history, and current interest rates will also impact how much house you can afford. Use ez Home Search’s affordability calculator to explore different scenarios and find a home that fits your budget.

Affordability measures how much house you can reasonably afford based on your holistic financial situation: income, debt, and recurring expenses. It weighs your budget and long-term financial goals.

Prequalification, on the other hand, is a lender’s estimate of how much you might be able to borrow based on your unverified financial information. It’s a preliminary assessment that gives a rough idea of your loan amount. Note that it doesn’t guarantee loan approval. Still, prequalification is a useful step when starting your home search. It can help find your maximum home price. However, home affordability is the broader concept that ensures you’re making a sustainable financial decision.

Improve how much home you can afford using the following strategies:

• Improve Your Credit Score: A higher credit score qualifies you for lower interest rates. That reduces your monthly payment and increases your buying power.
• Increase Your Down Payment: A larger down payment reduces the loan amount, thereby lowering your monthly mortgage cost. It helps you afford a more expensive home.
• Pay Down Existing Debt: Reducing your debt-to-income (DTI) ratio can increase the loan amount you qualify for. Focus on paying off high-interest debts to improve your DTI.
• Choose a Longer Loan Term: Opting for a 30-year mortgage instead of a 15-year mortgage lowers the monthly payments. It makes higher-priced homes more affordable.
• Shop for Lower Interest Rates: Even a small reduction in the mortgage interest rate can significantly impact your monthly payment. Explore different lenders and loan options to find the best rate. Look at private lenders, government financing, and more.

By taking these steps, potentially increase the amount of home you can afford and your home options.

Buying a home involves more than the purchase price. To make a wise financial decision, consider all the costs associated with homeownership and how these expenses fit into your budget.

• Down Payment: This is the upfront payment you make when buying a home. Typically it ranges from 3% to 20% of the purchase price. A larger down payment may reduce your monthly mortgage payments and eliminate the private mortgage insurance (PMI) requirement.
• Closing Costs: These fees are associated with finalizing the mortgage. They include loan origination fees, appraisal fees, title insurance, and attorney fees. Closing costs usually range from 2% to 5% of the home’s purchase price.
• Property Taxes: Amounts for property taxes vary by location and the property’s value. These taxes are often included in your monthly mortgage payment through an escrow account.
• Homeowners Insurance: This insurance protects your home and personal property against damage and loss. Lenders typically require it as a condition of purchase. It is often included in your monthly mortgage payment and paid through an escrow account, but not always. The cost of homeowners insurance depends on the location, size, age, and local risk factors.
• Private Mortgage Insurance (PMI): If your down payment is less than 20%, you may be required to pay PMI. This additional insurance protects the lender if the borrower defaults on the loan. PMI is added to your monthly mortgage payment.
• HOA Fees: If your home is part of a homeowners association, you’ll pay monthly or annual HOA fees. The fees cover the maintenance of common areas and amenities.
• Maintenance and Repairs: Owning a home means taking on the cost of maintaining it. Budget for regular maintenance, unexpected repairs, and potential upgrades. Experts recommend setting aside 1% to 3% of the home’s value annually for these expenses.
• Utilities: Ongoing costs like electricity, water, gas, and trash collection will become part of your monthly expenses. These can be higher than what you might pay as a renter. They may change monthly based on usage.

In addition to the costs directly related to buying a home, you add to your overall budget:

• Monthly Expenses: Think about your other essential monthly expenses: groceries, transportation, childcare, and entertainment. Ensure that your mortgage payment and associated costs fit comfortably within your existing budget.
• Planned Expenses: Consider any upcoming expenses, such as starting a family, education, or buying a new car. Factor these planned expenses into your decision on how much house you can afford.
• Emergency Fund: It’s crucial to have an emergency fund in place to cover unexpected expenses, such as medical bills or emergency home repairs. Ideally, this fund should cover three to six months of living expenses, including your current mortgage. Think of it as a comfortable cushion.

Owning a home can offer financial benefits compared to renting. Building equity over time and potentially saving on monthly housing comes to mind. However, these benefits depend on factors like the length of time you plan to stay in the home and real estate market conditions.

To make the most informed decision, consider speaking with one of our vetted local real estate agents. They provide personalized advice based on your financial situation to help you navigate the home-buying process. Make an informed decision that fits your long-term financial goals by considering all these costs and working with an expert.

Knowing when you’re ready to submit a mortgage application is crucial to a smooth home-buying process. Here are some signs you’re prepared:

• Stable Income: You have a reliable, steady income stream that can support a house payment and other homeownership costs.
• Good Credit Score: Your credit score is strong, ideally 620 or higher for conventional loans. That way you can qualify for better interest rates and loan terms.
• Low Debt-to-Income Ratio (DTI): Your DTI ratio is within a healthy range (ideally below 36%), indicating you can manage monthly mortgage payments alongside your other debts.
• Savings for Down Payment and Closing Costs: You’ve saved enough for a down payment (typically 3% to 20% of the purchase price). You have enough savings or investments to cover closing costs, which are usually 2% to 5% of the home’s price.
• Emergency Fund: You have an emergency fund in case of unexpected financial challenges. It can cover several months of living expenses, including your mortgage payment.
• Understanding of Homeownership Costs: You’re aware of and prepared for ongoing costs like property taxes, insurance, maintenance, and utilities.

If you meet these criteria, you’re likely ready to take the next step toward homeownership. You’ll be set to make a loan application when you find the right house.

If you want to increase your prequalification estimate, try these strategies:

• Improve Your Credit Score: Paying off debts, making timely minimum payments, and reducing credit card balances can boost your credit score. That may increase your prequalification amount.
• Increase Your Down Payment: A larger down payment reduces the loan amount you need and can raise your prequalification estimate.
• Reduce Your Debt: Paying down existing debts lowers your debt-to-income (DTI) ratio. That can increase the amount you’re prequalified to borrow.
• Choose a Longer Loan Term: Opting for a longer loan term (like 30 years instead of 15) lowers your monthly payments. That can increase your prequalification estimate.
• Provide Proof of Additional Income: If you have a side job or receive bonuses, showing proof of additional income can boost your prequalification amount.

Anything you do to improve your prequalification estimate will in turn increase your buying power.

Debt plays a significant role in determining how much home you can afford. Here’s how it affects your affordability:

• Debt-to-Income Ratio (DTI): Lenders use your DTI ratio to assess your ability to manage monthly payments. A higher DTI ratio indicates more of your income is tied up in debt, which limits the mortgage amount you qualify for.
• Impact on Monthly Payments: Existing monthly debt obligations reduce the amount of disposable income you have each month. This can decrease the amount you can allocate toward a mortgage payment and limit home affordability.
• Credit Score Considerations: High credit card debt can negatively impact your credit score. Higher interest rates increase your monthly payments, reducing how much home you can afford.
• Loan Approval: If your total debt burden is too high, you may struggle to get mortgage approval or you might only qualify for a smaller loan amount.

To improve your home affordability, focus on paying down existing debts. Keeping your DTI ratio within a manageable range is a wise financial practice.

To calculate your debt-to-income ratio, lenders look at all your existing financial obligations. These include:

• Credit Card Debt: Most lenders use your required minimum credit card payment and not necessarily the outstanding balances across all lines of credit.
• Monthly Rent or Mortgage Payment: Whatever you pay in housing is part of the debt-to-income calculation.
• Alimony or Child Support: Any court-ordered financial obligation to others is debt.
• Student loan payments
• Auto loan payments
• Other recurring debt: Any other loan you may have, such as for purchasing furniture, personal loans, or a home equity line of credit (HELOC).

Lenders do not include utilities, groceries, health insurance premiums, retirement contributions, and gas as recurring debt. Mortgage lenders ask for statements showing your debt as part of the application process.

Your credit score is heavily weighted when determining what you can afford. Here’s why:

• Interest Rates: A higher credit score typically qualifies you for lower mortgage interest rates. Lower rates reduce your monthly payment, allowing you to afford a more expensive home without stretching your budget.
• Loan Approval: Lenders use your credit score to assess your creditworthiness. A higher score increases your chances of getting approved for a mortgage and may give you access to better loan terms.
• PMI and Down Payment: With a higher credit score, you may be able to avoid private mortgage insurance (PMI) or qualify for a lower down payment requirement.
• Long-Term Savings: Securing a lower interest rate due to a high credit score can save you thousands of dollars over the life of your loan. That makes your home more affordable in the long run.

If your credit score is lower than you’d like, consider working on improving it before applying for a mortgage. Increasing your credit score can positively impact your ability to afford the home you want.

Private Mortgage Insurance (PMI) is an insurance policy that protects the lender if you default on your loan. Here’s how it affects your home affordability:

• Required for Low Down Payments: Most lenders require PMI if your down payment is less than 20% of the home’s purchase price. This insurance increases your monthly mortgage payment, reducing your overall home affordability.
• Impact on Monthly Payments: PMI is typically included in your monthly mortgage payment. The amount varies based on the loan size and your credit score. The higher your PMI, the less home you can afford within your budget.
• Duration of PMI: PMI can usually be canceled once you’ve reached 20% equity in your home. That reduces your monthly payment and increases your affordability later on. However, this isn’t automatic, and you’ll need to request cancellation from your lender. Depending on the financial situation and market appreciation, it may take several years to pay down the mortgage balance and reach this point.

To avoid PMI, consider making a down payment of at least 20%. Or, explore loan options that don’t require PMI, such as VA loans.

Since property taxes add to your monthly housing costs, they are an essential factor in determining your home affordability. Here’s what you need to know:

• Vary by Location: Property tax rates vary depending on where you live. Homes in areas with higher property taxes will cost more to own, which can reduce how much house you can afford.
• Included in Monthly Payment: Property taxes are often added to your monthly mortgage payment and paid through an escrow account. Factor in these taxes when determining your housing budget.
• Impact on Loan Approval: Lenders consider the cost of property taxes when calculating your debt-to-income (DTI) ratio. High annual property taxes could affect your ability to qualify for a mortgage or reduce your borrowing power.
• Annual Increases: The amounts for property taxes increase over time due to changes in property value or tax rates. That can affect your long-term affordability. Remember potential future increases when deciding how much home you can afford.

So, remember property taxes when calculating your home affordability. It’s part of making a sustainable financial decision.

Absolutely, future expenses should weigh into determining how much house you can afford. When planning for a home purchase, think beyond your current financial situation. Upcoming life changes could impact your home buying budget. Here’s how:

• Life Events: Major life events–getting married, having children, or retiring–often come with increased expenses. For example, starting a family means additional childcare, education, and healthcare costs. If you’re nearing retirement, you might prioritize making your mortgage manageable on a reduced income.
• Career Changes: If you anticipate a career change or move that could affect your income, factor it into your affordability calculations. You want the mortgage payment to remain comfortable even if your income fluctuates.
• Planned Large Purchases: If you’re planning to buy a new car, invest in home renovations, or take on other large expenses in the near future, these matter when determining how much you can afford to spend on a home.

Planning for the future is how you avoid financial strain and check that your home purchase supports your long-term goals and financial stability. A financial advisor can help you plan ahead, including how purchasing a home factors into growing wealth.

An adjustable-rate mortgage (ARM) can initially make a home more affordable due to the lower interest rates during the initial fixed period. However, learn about ARMs potential risks and benefits:

• Lower Initial Rates: ARMs typically offer lower interest rates during the initial period (e.g., 5, 7, or 10 years). That reduces your monthly payments and makes a more expensive home seem affordable.
• Rate Adjustments: After the initial period, the interest rate on an ARM can adjust annually based on current market conditions. This means your monthly payment could increase significantly, affecting your long-term affordability.
• Best for Short-Term Ownership: ARMs might be a good option if you plan to sell the home or refinance before the rate adjusts. However, if you intend to stay in the home long-term, future rate increases could change its affordability.
• Risk vs. Reward: While the initial savings on an ARM can be appealing, consider your risk tolerance and future financial plans. You need to be prepared for higher payments if interest rates rise.

Understanding how an ARM affects your affordability down the road is key to making a decision that aligns with your financial goals and comfort level.

The main difference between a fixed-rate and adjustable-rate mortgage (ARM) lies in how the monthly payment interest rate is structured. This change impacts long-term affordability:

• Fixed-Rate Mortgage:
  • Consistent Payments: With a fixed-rate mortgage, your interest rate and monthly payment remain the same throughout the life of the loan. This stability makes budgeting easier and ensures your payments won’t increase over time. In the beginning, more of the monthly payment will go to the interest rather than the mortgage principal.
  • Long-Term Affordability: While fixed-rate loans might have higher initial rates compared to ARMs, they provide long-term affordability by locking in a predictable payment. Stability can be valuable if you plan to stay in your home for many years.
• Adjustable-Rate Mortgage (ARM):
  • Lower Initial Payments: ARMs often start with a lower interest rate than fixed-rate mortgages. That can make your initial payments more affordable and allow you to qualify for a larger loan. More of the payment goes to the interest rather than the mortgage principal to start.
  • Potential for Rate Increases: After the initial fixed period, the rate can adjust based on market conditions. This may potentially increase your monthly payment if market rates rise. This uncertainty can affect your long-term affordability.

Picking between these loan choices depends on your financial situation, how long you plan to stay in the home, and your comfort with potential rate fluctuations. A fixed-rate mortgage offers stability and it is the most common mortgage type. The ARM may bring short-term savings but has potential long-term risks.

Closing costs are an essential part of determining how much house you can afford. These costs are the fees and expenses associated with finalizing your mortgage. They significantly increase your upfront cash outlay. Here’s what to know about closing costs:

• Upfront Costs: Closing costs typically range from 2% to 5% of the home’s purchase price. These include fees for the loan origination, appraisal, title insurance, attorney services, and more. Since these costs are paid at closing, they add to the amount of cash you need to have on hand when buying a home.
• Impact on Down Payment: If you have a limited budget, the amount you allocate to closing costs could reduce your available funds for a down payment. That might impact your loan amount and monthly payment.
• Budgeting for Closing Costs: In addition to saving for a down payment, remember closing costs when calculating your home buying budget. Neglecting these costs could leave you financially stretched or lead you to buy a less expensive home.
• Negotiating Closing Costs: Sometimes you can negotiate with the seller to cover some of the closing costs. However, this isn’t guaranteed, so it’s best to plan for these costs upfront.

Remember to include closing costs early in the home-buying process. That way, you’re fully prepared and confident your home purchase fits within your financial means.

Your down payment plays a crucial role in determining how much house you can afford. Here’s why:

• Reduces Loan Amount: A larger down payment reduces the amount you need to borrow. In turn, it lowers your monthly mortgage payments and total interest paid over the life of the loan.
• Avoids Private Mortgage Insurance (PMI): If you can make a down payment of at least 20%, you can avoid PMI, which is an additional monthly cost lenders require for lower down payments. Avoiding PMI can make a more expensive home affordable within your budget.
• Increases Loan Approval Chances: A larger down payment can improve your chances of being approved for a mortgage, especially if your credit score is low or debt-to-income ratio is on the high side. Lenders view a substantial down payment as a sign of financial stability and lower risk.
• Builds Equity Faster: A larger down payment means you start with more equity in your home. This can be beneficial if you plan to sell the home in the near future or if you need to access home equity for a loan or line of credit.
• Impacts Interest Rates: In some cases, a larger down payment can lead to better interest rates, further reducing your monthly payment and improving home affordability.

When deciding how much house you can afford, consider your down payment amount and how it will impact your monthly payments, loan approval, and overall financial health.

ez Home Search’s affordability calculator is one tool to help you on your homebuying journey. Running the numbers on your debt, income, and current rates, ahead of time makes conversations with mortgage professionals that much more meaningful.

Definitely shop around and talk to multiple mortgage lenders to find the lowest mortgage rate and best terms for you. Some may have special loans, like payment assistance programs or a 15% down payment option. There are ways to get your home loan into an affordable range for you.

Some areas have more affordable real estate markets than others. Looking for a home in these areas can boost your borrowing leverage and how much home you can buy.