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<\/span><\/div>\n<\/div>\n<\/div>\nBefore buying a home, you’ll need to know how much house you can afford. Your budget is determined by many factors, but the size and type of mortgage<\/a> you qualify for, as well as your down payment, are the biggest. Understanding how much you can comfortably spend on a monthly mortgage payment is essential during the homebuying process, particularly for first-time buyers.<\/p>\n Read on for tips on figuring out your homebuying price range, and check out our mortgage calculator for a quick and easy estimate.<\/p>\n In this guide, we\u2019ll cover:<\/p>\n Purchasing a home is a decision that will impact your finances for years to come. To avoid winding up with a home loan you can\u2019t afford, calculate your monthly income and expenses carefully before you take the plunge.<\/p>\n How much house you can afford will largely depend on:<\/p>\n Most homebuyers take out a conventional mortgage loan. These loans typically require a down payment of no less than 3% of the property value, a minimum credit score of 620, a debt-to-income ratio of 36% and a monthly payment that doesn\u2019t exceed 28% of the buyer\u2019s pre-tax income.<\/p>\n Lenders will also look at a buyer\u2019s ability to deal with all the fees and upfront costs associated with buying a home, such as closing costs and insurance fees. Your down payment also plays a big role. If you\u2019re able to come to the table with a large down payment, it can increase your buying budget (as it means you need to borrow less and can therefore go further up in price). The interest rate you qualify for \u2014 which relies heavily on your credit score \u2014 also factors in as well.<\/p>\n Keep in mind that there are other loan types you may qualify for that have fewer restrictions and provide other benefits. Our best mortgage lenders<\/a> page provides reviews for different lenders that may meet your needs.<\/p>\n Depending on your current financial situation and your credit score, a loan insured by the Federal Housing Administration \u2014 known as an FHA loan \u2014 can give you the opportunity to purchase a home with fewer restrictions than a regular mortgage.<\/p>\n FHA loans feature maximum qualifying ratios<\/a> of 31\/43 for most applicants with a credit score higher than 500 \u2014 this means that no more than 31% of your income should go to housing costs while 43% should be allocated to total debt. Most loans require a 28\/36<\/a> ratio. This makes FHA loans ideal for those who might have less income or a shorter credit history.<\/p>\n If your credit score is over 580, you may be allowed to have a ratio as high as 40\/50 with this type of loan, as long as you meet other requirements. Typically, you\u2019ll need what are called \u201ccompensating factors.\u201d These are financial factors that reduce your risk of default and can include things like a particularly flush savings account, significant additional income, a very large down payment or an especially high credit score.<\/p>\n Borrowers with a credit score of 580 and above could also pay as little as 3.5% as a down payment, lower than the typical 10% required with scores under this threshold.<\/p>\n You should also be aware of the maximum loan amounts associated with FHA loans. For a single-family home, the maximum limit will vary by county and range from $524,225 in low-cost areas to $1,209,750 in high-cost areas. In many areas, the loan limit will be $806,500. Here’s a look at the full scope of borrowing limits:<\/p>\n One unit<\/p>\n Two units\n <\/p>\n Three units\n <\/p>\n Four units\n <\/p>\n<\/div>\n<\/div>\n Maximum limit in low-cost areas:<\/p>\n<\/p><\/div>\n<\/div>\n Maximum limit in high-cost areas:<\/p>\n<\/div>\n<\/div>\n<\/div>\n<\/div>\n<\/div>\n While the maximum debt-to-income ratio is set at 41% in the general guidelines<\/a> for VA loans, the VA backs loans for people with higher ratios provided they meet other requirements. VA loans don\u2019t have credit score requirements (although the credit score will still affect the borrower\u2019s interest rates) and borrowers can qualify for a 0% down payment.<\/p>\n These loans are only for active U.S. military members, veterans and their qualifying spouses. You\u2019ll also need to meet certain days-of-service requirements to be eligible.<\/p>\n USDA loan terms for qualifying rural areas are much more flexible than regular loans. They don\u2019t require a down payment and can include the mortgage insurance fee in the loan. This means you can actually finance 102% of the home value and avoid paying this fee upfront.<\/p>\n Keep in mind, however, that there are parameters for income eligibility (borrowers must earn a maximum of 115% of the median household income) and for the price and size of the house itself. Even if you can afford a certain amount of money, the eligibility might be for a less expensive home.<\/p>\n In order to see these requirements in detail, you can go to the USDA<\/a> website and look at the qualifying areas and income by county. Generally, only rural and some suburban areas will qualify.<\/p>\n Before you start scrolling through real estate listings, come up with a price range of what you can afford. Money\u2019s home affordability calculator above spits out estimates based on either your debt-to-income ratio or your estimated budget.<\/p>\n Once you\u2019ve plugged in all your info, you\u2019ll get an estimated number for the maximum amount you can pay for a house, plus your estimated monthly mortgage payment.<\/p>\n The interest rate you qualify for plays a big part in your budget. It influences both your monthly payments and the long-term costs of the loan.<\/p>\n Current market rates<\/a> will affect what rate you can get, but personal factors \u2014 like your credit score and down payment \u2014 will play even bigger roles. Generally speaking, the better your score and the more you put down, the lower your interest rate will be.<\/p>\n Affordability can also be influenced by whether you choose a fixed-rate or adjustable-rate mortgage, the length of your loan term and the type of mortgage product you use. VA and FHA loans, for instance, tend to have lower rates than conventional ones (because they have government backing, which lowers the risk for lenders). Short-term loans also tend to have lower interest rates.<\/p>\n Your credit score is another important factor in determining how much house you can afford. Credit scores influence everything from your interest rate to your approval odds \u2014 maintaining a good one (typically 620 or higher<\/a>) can lead to more favorable loan terms and make homeownership a more achievable goal.<\/p>\n You can check your credit score through any of the three credit bureaus \u2014 Experian, Equifax or TransUnion, or you can check with your bank or credit card issuer. Many will offer free credit score monitoring as part of their monthly services.<\/p>\n The amount of money your household brings in each month is one of the main things lenders look at when you apply for a mortgage. Your lender will also want to see consistency in your income to ensure you can reliably make your payments each month.<\/p>\n Remember, though, that just because you can get a loan doesn\u2019t mean you should, and it\u2019s your responsibility to take a look at your entire financial picture (and whether paying for the house you\u2019re interested in is doable with your budget) before signing on the dotted line.<\/p>\n Home value influences purchase price, down payment requirements, loan amounts, property taxes, insurance costs and ongoing maintenance expenses. Carefully consider the long-term costs of owning each potential property you\u2019re eyeing.<\/p>\n The debt-to-income (DTI) ratio is a metric mortgage lenders use to determine whether you qualify for a mortgage, and the size of the loan you can secure. Not only do mortgage lenders have maximum DTIs you\u2019ll need to fall under to qualify, but your DTI can also impact how much you\u2019re able to borrow and the rate you get, too. Lower DTIs will likely get you more favorable terms.<\/p>\n Use this DTI calculator<\/a> to understand what numbers you\u2019re working with. And if your DTI is too high to qualify, work on paying down debts or consider taking on some extra hours or freelance work. This can increase your income and lower your DTI simultaneously.<\/p>\n Property taxes and homeowners’ insurance can add a sizable amount of money to your recurring home expenses. You\u2019ll usually pay a portion of them each month as part of your monthly payment (this is called \u201cescrow\u201d). The lower these fees, the lower your payment will be \u2014 and the bigger budget you\u2019ll have.<\/p>\n In most cases, if your down payment is less than 20% of the home\u2019s purchase price, you\u2019ll be on the hook for private mortgage insurance (PMI) too. This is also paid monthly along with your mortgage payment.<\/p>\n Some homeowners pay a mandatory monthly fee to their local homeowners association (HOA), which goes towards the maintenance and repair of shared areas (pools, landscaping, elevators and the like). If the house you want to buy has an HOA, don\u2019t forget to factor this into your budget, too.<\/p>\n Make sure you are able to comfortably afford the monthly mortgage payments. A general rule of thumb is that no more than 30% of your pre-tax income should go towards housing costs, but that can vary by lender.<\/p>\n At one point, lenders used what is called the 28\/36 rule to ensure a borrower could afford the loan. Under this rule, housing expenses should take up 28% or less of your gross income. Your total debt payments, which include credit cards, other loans, and mortgage payments, should not exceed 36%.<\/p>\n In concrete numbers, the 28\/36 guideline means that a borrower who makes $5,000 a month should not spend more than $1,400 on housing costs every month.<\/p>\n If you\u2019re a renter making $5,000 a month, it\u2019s a good rule of thumb to spend a maximum of $1,400 on rent. However, for a homeowner making the same amount, $1,400 (28%) should cover your monthly mortgage payment, as well as homeowners insurance<\/a> premiums, mortgage insurance premiums and property taxes.<\/p>\n The 28\/36 rule may be useful for prospective buyers when determining the housing payment they\u2019re more comfortable with. But, many lenders will determine your ability to afford a new home by using a higher total debt limit of 50% for conventional loans and 43% for jumbo loans. FHA and VA loans will have different limits.<\/p>\n It\u2019s important to request your credit report and find out your credit score before you start the application process.<\/p>\n Your credit score<\/a> is a three-digit summary of your creditworthiness. Borrowers with high credit scores will typically be offered the lowest interest rates, while those with low scores will be offered the most expensive rates.<\/p>\n You can get a free credit report<\/a> once per year from each of the three major credit bureaus<\/a>. You may also access your credit report for free under certain conditions, for example, if you\u2019re the victim of identity theft.<\/p>\n Additionally, a program that began under the CARES Act that provided free weekly reports from the three major credit bureaus has been permanently extended.<\/p>\n Your debt-to-income ratio (DTI) compares how much debt you owe to how much pre-tax income you earn per month. It\u2019s an important metric that lenders use to determine how much you can borrow \u2014 or if you can borrow at all.<\/p>\n Lenders prefer borrowers with a DTI that is below the maximum allowed and may offer better interest rates to these applicants. You can input your information and calculate your DTI using Money\u2019s debt-to-income ratio calculator<\/a>.<\/p>\n If you don\u2019t qualify for a VA loan<\/a>, USDA loan or other 0% down payment mortgage program, most buyers will have to give a down payment on their potential home. Conventional loans typically require a minimum down payment of 5% of the purchase price or more. However, it could be as little as 3% if you have a low DTI ratio, a high credit score and meet other requirements.<\/p>\n For FHA loans, the minimum is 3.5%. While not required, a 20% down payment is often ideal. This could:<\/p>\n If you don\u2019t have enough money for a 20% down payment, you may be able to refinance your mortgage down the road, remove PMI and, depending on the real estate market, snag a better interest rate. (For more info on refinancing, check out our list of the best mortgage refinance lenders<\/a> and our mortgage refinance calculator<\/a>.)<\/p>\n There are several options to consider if you are struggling to afford the home you have your eyes on. Some methods must be undertaken over time, whereas others will immediately impact your mortgage application.<\/p>\n DTI is one of the most important factors that lenders consider when looking at borrowers. Lowering your DTI by paying off as much debt as possible is a good option if your DTI is too high to get pre-qualified for a reasonable interest rate (or to qualify at all).<\/p>\n An optimal DTI is 36% or below, including possible housing costs, but excluding current rent payments, if any. If your monthly income is, for example, $5,000, then you shouldn\u2019t owe more than $1,800 per month.<\/p>\n If your current debt is around $600 a month, your housing expenses can be $1,200. Also, if you have already calculated all expenses on a house and get a certain number, say, $1,450, you should try and cut down your $600 monthly payments by $250 for a better chance at a loan.<\/p>\n Reducing your debts is your best bet for lowering your DTI, but increasing your income can help, too. You may want to ask for a raise or take on a side gig to help.<\/p>\n There are several ways to improve your credit score. First, it\u2019s important to check your credit report from all three bureaus \u2014 Experian, TransUnion and Equifax \u2014 for inaccuracies. If there are mistakes in your credit history, you can file a dispute with the credit agencies. They are legally required to address any inaccuracies promptly, which should improve your score.<\/p>\n If the information being reported is accurate, make sure to resolve any collection attempts, pay your bills on time every month and, if possible, reduce your overall credit card debt. The higher your credit score, the lower your interest rate and monthly payment.<\/p>\n The type of mortgage you\u2019re requesting will help determine a lender\u2019s flexibility in evaluating your loan application. Loans insured by the federal government \u2014 such as FHA loans, VA loans and USDA loans \u2014 all have certain benefits that may help you afford the home you want.<\/p>\n FHA loans<\/a> are insured by the Federal Housing Administration. This means that banks get paid even if you default on your mortgage, and so are likely to be more flexible with their credit and down payment requirements. Note that, in order to qualify for an FHA loan, the borrower must intend to use the house as a primary residence and live in it within two months after closing.<\/p>\n Borrowers who have served or have certain military connections may qualify for a VA loan<\/a>. VA loans are more lenient than conventional and FHA loans. They are backed by the Department of Veterans Affairs and typically don\u2019t require a down payment unless you\u2019re borrowing a particularly large amount.<\/p>\n Eligibility requirements depend on the period and amount of time you served in the military. However, there are many ways to qualify whether you\u2019re a veteran, active duty service member, reservist or member of the National Guard. There are also opportunities for members who were discharged.<\/p>\n To read more about the qualifications and process for getting a Certificate of Eligibility, visit the U.S. Department of Veterans Affairs<\/a>. And if you\u2019d like to explore your VA loan options, visit our best VA loans<\/a> page.<\/p>\n USDA loans are backed by the U.S. Department of Agriculture and offer certain benefits that conventional loans don\u2019t.<\/p>\n They\u2019re designed to help finance homes in eligible rural areas. The desired property must fall within specific geographical areas, generally outside the limits of major metropolitan centers. It must also be a primary residence with a relatively low cost.<\/p>\n If you are eligible, USDA loans have many benefits, including allowing you to build, rehabilitate, improve or relocate a dwelling as your primary residence to your new location. They also require no down payment.<\/p>\n The typical recommended down payment for a house is 20% of the sale price. This is because lower down payments usually require that the borrower pay for private mortgage insurance (PMI), which increases the monthly payment. Having said that, 20% isn\u2019t always necessary. Some loan types, such as FHA loans, require a down payment of only 3.5%, and others, such as VA loans, don\u2019t require one at all. <\/p>\n<\/div>\n The interest rate you qualify for will determine how high your monthly payment will be. For example, a $420,000 house mortgaged for 30 years with a 7% interest rate will have a monthly payment of $2794.27, while that same house at a 9% interest rate hikes the payment up to $3379.41. The specifics of how often your interest rate is compounded and what the average interest rate is can vary by state and bank, and be affected by your financial standing. <\/p>\n<\/div>\n You can use a debt-to-income ratio (DTI) calculator to find out how much a mortgage lender is willing to lend you based on your current financial situation. Most lenders prefer a DTI of 43% or less, although some will accept a DTI as high as 50%.
Besides your house payment, the monthly costs of owning a home include homeowner\u2019s insurance, property taxes, fees related to your homeowner\u2019s association and overall maintenance. These costs can vary depending on the state you live in, the HOA you belong to and the overall condition of your home at the time of buying.<\/p>\n<\/div>\n<\/div>\n<\/div>\n How much house you can afford depends mainly on two factors: your eligibility for a mortgage loan and your actual budget when it comes to paying a monthly bill, along with taxes and insurance. Remember these steps when you\u2019re getting ready to make your home purchase:<\/p>\n Ads by Money. We may be compensated if you click this ad.Ad Before buying a home, you’ll need to know how much house you can afford. Your budget is determined by many factors, but the size and type of mortgage you qualify for, as well as your down payment, are the biggest. Understanding how much […]<\/p>\n","protected":false},"author":1,"featured_media":249800,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[93],"tags":[11348,594],"dealstore":[],"offerexpiration":[],"class_list":["post-249799","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-finance","tag-afford","tag-house"],"yoast_head":"\n<\/span><\/div>\n<\/div>\n<\/div>\nHow Much Home Can I Afford?<\/h2>\n
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How much house can I afford with an FHA loan?<\/h3>\n
How much house can I afford with a VA loan?<\/h3>\n
How much house can I afford with a USDA loan?<\/h3>\n
How to calculate your home affordability<\/h2>\n
1. Know the factors that affect home affordability<\/h3>\n
Mortgage rates<\/h4>\n
Credit scores<\/h4>\n
Income<\/h4>\n
Home value<\/h4>\n
Debt-to-income ratio<\/h4>\n
Property taxes and insurance<\/h4>\n
Homeowners association (HOA) fees<\/h4>\n
2. Don’t overextend yourself<\/h3>\n
3. Check your credit score<\/h3>\n
<\/span><\/div>\n<\/div>\n<\/div>\n4. Calculate your debt-to-income ratio<\/h3>\n
5. Make a down payment<\/h3>\n
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Ways to improve your house affordability<\/h2>\n
Lower your DTI<\/h3>\n
Raise your credit score<\/h3>\n
Consider applying for federal loans<\/h3>\n
FHA loans<\/h4>\n
VA loans<\/h4>\n
USDA loans<\/h4>\n
<\/span><\/div>\n<\/div>\n<\/div>\nRecent news on home affordability<\/h2>\n
Home Affordability FAQs<\/h2>\n<\/p>\n
How much money do I need for a down payment?<\/h3>\n<\/div>\n
How will interest rates affect your home loan?<\/h3>\n<\/div>\n
How do I calculate my home affordability based on my income?<\/h3>\n<\/div>\n
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\n To calculate your DTI, you need to know your gross monthly income and any monthly payments you make, whether it’s to pay off a car, a credit card or any other outstanding debt you might have. For example, someone making $2000 in gross monthly income with a $300 monthly car payment and $100 in monthly credit card payments has a 20% debt-to-income ratio. This simply means that they are using 20% of their monthly income to pay their debts.<\/p>\n<\/div>\nWhat are the actual monthly costs of owning a home?<\/h3>\n<\/div>\n
Summary of Money\u2019s guide to home affordability<\/h2>\n
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