How much house can I afford?
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- Down payment & closing costs
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Down payment & closing costs
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How it’s calculated
The average American household income is $73,298, assuming you have no monthly debt payments you can afford a home priced at $285,000 with a 3.5% ($10,000) down payment for $1,800 per month.
Our home affordability calculator takes several factors to determine what you qualify for. This calculator provides the best possible estimate of the maximum borrowing power you have based on these factors. It is not intended to be exact.
Income and debts – First, we factor in your pre-tax salary and monthly debt payments. These monthly payments include car payments and credit card, or student loan debt.
Property taxes – Taxes are included and are adjusted based on the state you are purchasing in.
Credit Score – One of the most significant factors in determining how much of a home you can afford is your credit rating. Your interest rate is directly tied to your FICO score. The higher your score, the lower your interest rate. You can adjust the mortgage calculator to factor in your credit score, which will adjust the interest rate accordingly.
Debt-to-income ratio – The amount of your monthly obligations compared to your monthly income is called your DTI, or debt-to-income ratio. The maximum back-end DTI ratio most mortgages require is 41% and a front-end ratio of 31%. In the chart, you can adjust the DTI ratio to see how much house you can afford at different rates.
Front-end ratio – The front-end DTI ratio does not include your mortgage payment in your monthly debt payments.
Back-end ratio – The back-end DTI ratio does include your estimated monthly mortgage payment, including escrow into your monthly debt obligations.
Down Payment – Automatically adjusts your borrowing power and monthly housing costs based on the amount of your down payment.
PMI – If you put less than 20% down on a home, you will be required to have mortgage insurance. PMI is automatically added if you have a loan-to-value ratio higher than 80%.
How Much House Can I Afford?
Several factors come into play when mortgage lenders calculate how much of a housing payment you can afford.
Your gross income, savings, amount of money left over after you pay all the housing expenses, interest rate, credit score, down payment, and other costs are all factors in determining what monthly mortgage payment you can afford.
When initially going through the mortgage pre-approval process, you will be given a maximum loan amount you qualify for by your mortgage lender.
When determining the amount you qualify for your debt-to-income ratio, or DTI ratio is one of the most critical factors. Your DTI ratio is the amount of your monthly debt payments compared to your monthly income.
Most mortgage lenders prefer a borrowers’ DTI ratio to be no higher than 36%. However, most mortgage loans will allow for a DTI ratio as high as 41%, maybe more. Your gross monthly income, which is your take-home pay after taxes.
The more money you make, the higher your DTI ratio can afford to be. Someone with an annual income of $120,000, or $10,000 monthly gross income could have a $3,500 monthly payment (35% DTI ratio) but still have $6500 for other expenses, which is more than enough.
While someone with an annual income of $60,000, or a gross monthly income of $5,000 with a $1,750 monthly payment and the same 35% DTI ratio will be pushing it with just $3,250 leftover for additional expenses.
The person with $6,500 additional income after monthly debt expenses can afford to pay a higher DTI ratio than the person with $3,250 in extra income.
Additional Costs of Homeownership
When buying a home, it’s important to note that there are more costs associated than just the principle and interest. Here are the additional costs our home affordability calculator takes into account.
Unless you’re putting at least 20% of the purchase price as a down payment, you will be required to carry private mortgage insurance (PMI). Mortgage insurance protects the lender in the event a borrower defaults on their mortgage.
Conventional loans require PMI for all loans with a loan-to-value ratio above 80%. FHA loans require a mortgage insurance premium (MIP) for all loans regardless of the down payment amount.
FHA loans require front-end MIP and back-end MIP.
- Front-End Ratio – FHA loans come with a front-end MIP fee of 1.75% of the loan amount. This fee may be able to be rolled into your loan. This is a one-time payment and is subject to be refunded if you refinance your mortgage within three years of closing.
- Back-End Ratio – The back-end MIP fee is also called annual mortgage insurance because it’s a recurring fee charged each year until you’re no longer required to have mortgage insurance. The insurance fee is typically 0.85% of the loan amount. It’s 0.80% of the loan amount if you put at least 10% down on your mortgage.
Make sure you budget for homeowners’ insurance when calculating how much house you can afford. Homeowners’ insurance is typically around $1000 per year. It can be more or less, depending on your home value.
Our mortgage affordability calculator factors homeowner insurance into the monthly mortgage payment.
Closing costs are fees charged by lenders for processing and issuing a mortgage loan. These fees run about 2%-5% on average and are determined by your FICO score. The lower your credit rating, the higher the risk you present to the lender, so they charge higher fees to offset that risk.
You should find out if there is a homeowner association (HOA) in the neighborhood you are planning on moving to and what the costs are. The annual HOA dues need to be factored into your monthly mortgage payment as well. These HOA costs range from as little as $200-$300 per year up to $1,500 yearly. Your real estate agent should be able to find this out for you.
FHA loans are great for first-time homebuyers because of the low credit score and down-payment requirements. FHA home loans may be a good option for low-to-moderate-income homebuyers because they allow for a slightly higher DTI ratio in some cases. As high as 50% can be accepted by some mortgage lenders.
If you qualify for a VA loan, then you will not be required to pay mortgage insurance. Our calculator does not yet have the ability to calculate VA mortgage payments. Please remove the mortgage insurance premium; this will be your monthly payment. You will be able to afford a little more than the calculator projects.
Fixed-Rate vs. Adjustable-Rate Mortgages
A fixed-rate mortgage has the same interest rate for the life of the loan. The longer the term, the higher the rate will be. 15 year-rates are up to 1% lower; you can adjust the mortgage length to see what your payment will be.
Adjustable-rate mortgages have an initial period with a set rate, usually for five years. After the initial rate, it will increase annually. If you are planning on moving within five years, you should consider an adjustable-rate mortgage.
How to Increase Your Maximum Loan Amount
Opt for a Longer Loan Term
The loan term is the loan repayment period. The most common mortgage loan term is the 30-year mortgage, followed by a 15-year mortgage. The longer the loan term is the lower your monthly mortgage payment will be. This reduces your debt-to-income ratio allowing you to get approved for a more expensive home.
Increase Your Credit Score
The higher your credit score, the higher the loan amount you will qualify for. By maximizing your FICO score before you speak to a lender, you can get approved for a more expensive home.
There are some easy ways to increase your credit score quickly. Paying down the balances on your credit cards can make the most significant difference.
Your credit card debt compared to the credit limit is your credit utilization ratio, which accounts for 30% of your credit score. Only your credit history (35%) has a bigger impact on your credit report. Get the balance below 10% of the limit and watch your score increase.
Put 20% down
Not only is 20% down going to help you qualify for a more expensive house. You will eliminate thousands of dollars a year in extra costs by noting having PMI.
Mortgage insurance is around 0.50-0.85% of the loan amount and adds hundreds of dollars to your monthly payment. A lower loan-to-value ratio may allow the lender to accept a higher debt-to-income ratio.
Pay off Debt
If you have a lot of debt piled up, not only is it hurting your credit score, it’s hurting how much you can get approved for. If you have any monthly debt obligations, you can pay off it will reduce your debt-to-income ratio, which in turn helps you afford a more expensive home.
Paying off credit card balances will also increase your credit score by lowering your credit utilization ratio which in turn will get you a better mortgage rate.