August 8th, 2018 | Purchasing a Home, Preapproval, Pre-qualification
When you are ready to buy a home, whether for the first time or the tenth, it is always important to know how much you can afford to spend. This will help you narrow your home search and ensure you do not get in over your head financially. There are several factors to consider when determining how much house you can afford.
Debt Ratios
The 28/36 figures in this article are budgeting guidelines: the first compares housing costs with income and the second includes other monthly debts. They are not universal approval limits. Lender and program criteria vary; calculate both ratios with the same income basis, then compare the result with your actual household budget.
Credit
How much you can afford for a house will also be determined by your credit history and FICO score. These factors will influence what type of mortgage you can qualify for and how low the interest rate will be. If your credit score is less-than-perfect, your mortgage interest rate will be higher, making your monthly payment higher and reducing how much you can actually spend on a house. If your credit profile is not as clean as you would like it to be right now, you can take steps to improve your FICO score before applying for a mortgage.
Down Payment
Down payment requirements differ by program. FHA has a minimum down payment, while eligible VA and USDA loans may offer no down payment. For conventional loans, a down payment below 20% can mean private mortgage insurance; other programs have their own insurance or fee arrangements. Compare the cash needed upfront with the full monthly payment rather than treating 20% as a requirement for every loan. The program pages explain FHA, VA, and USDA options.
Beyond coming up with these numbers, you should consider your lifestyle when it comes to how much you can afford. Buying a home can come with many hidden costs - repairing and replacing various parts and appliances, HOA dues, higher utilities, yard work, renovation – and those can eat into your budget for other things like entertainment or savings. It is important to set a house budget that will give you enough cushion to still be able to pay for not only the essentials of food and transportation, but also for your retirement goals, saving for kids’ college and vacation plans.
With some careful calculations on your own and possibly with the help of online tools, you can figure out how much home you can truly afford without stretching your resources too thin. When you buy a house within that budgeted price range, homeownership can be just as enjoyable as you have dreamed it would.
To discuss your budget or loan questions, contact us.
Build an affordability estimate step by step
- Start with income and current monthly debts. Calculate the housing and total-debt ratios; lender and program thresholds vary.
- Estimate the full housing payment. Include mortgage principal and interest, taxes, HOA fees, and any mortgage insurance that applies.
- Account for the down payment and other costs. A larger contribution can change loan options, while repairs, utilities, and upkeep also affect the household budget.
- Leave room for other priorities. Compare the estimate with transportation, food, savings, retirement, and other household plans.
For the underlying ratio calculation, see How to Calculate Your Debt-to-Income Ratio. An affordability estimate is not a loan approval.
From loan payment to household budget
A principal-and-interest payment is only part of the cost. Add taxes, insurance, association fees, and upkeep; then allow for other spending and the savings you want to keep.
- Use take-home income for your household spending plan.
- Enter each cost once: do not add escrow taxes or insurance again if already included in an entered total.
- Replace estimates with property tax information and insurance quotes as you learn more about the home.
Build your monthly housing budget. This spending plan does not determine lender approval.
Further detail: CFPB: planning monthly home costs.
What to check next
- Separate the parts of a mortgage billIdentify taxes, insurance, and costs outside principal and interest.
- Check the full monthly budgetEnter your own housing costs, other spending, and savings.
More in Buying a home.