How Much House Can I Afford? Home Affordability Calculator

If you can’t afford to pay cash for a house, you’re in good company. In 2019, 86% of homebuyers used a mortgage to close the deal, according to the National Association of Realtors. The younger you are, the more likely you are to need a mortgage to buy a home—and the more likely you are to be asking, “How much house can I afford?” since you haven’t gone through the experience yet.

We’re here to help you answer this question in detail.

Estimate Your Monthly Payments with an Affordability Calculator

Calculator provided by Better Mortgage.

How Do I Calculate How Much House I Can Afford?

Let’s go over some of the inputs to our home affordability calculator, plus some extra factors you’ll want to consider.

Income

Income is the most obvious factor in how much house you can buy: The more you make, the more house you can afford, right? Yes, sort of; it depends on how much of your income is already spoken for through debt payments.

Debt

You might be making payments on a car loan, credit card, personal loan or student loan. At a minimum, lenders will total up all the monthly debt payments you’ll be making for the next 10 months or longer. Sometimes they will even include debts you’re only paying for a few more months if those payments significantly affect how much monthly mortgage payment you can afford.

What if you have a student loan in deferment or forbearance and you’re not making payments right now? Many homebuyers are surprised to learn that lenders factor your future student loan payment into your monthly debt payments. After all, deferment and forbearance only grant borrowers a short-term reprieve—much shorter than your mortgage term will be.

Debt-to-Income Ratio, or DTI

The calculator doesn’t display your debt-to-income ratio, but lenders care a lot about this number. They don’t want you to be overextended and unable to make your mortgage payments.

There are two types of DTI: front-end and back-end.

Front end only includes your housing payment. Lenders usually don’t want you to spend more than 31% to 36% of your monthly income on principal, interest, property taxes and insurance.

Let’s say your total monthly income is $7,000. Your housing payment shouldn’t be more than $2,170 to $2,520.

Back-end DTI adds your existing debts to your proposed mortgage payment. Lenders want your back-end DTI to be no higher than 41% to 50%, depending on the type of mortgage you’re applying for and other aspects of your finances, like your credit score and down payment. About 25% of borrowers in 2019 had a DTI higher than 43%, according to CoreLogic, a property data company.

Let’s say your car payment, credit card payment and student loan payment add up to $1,050 per month. That’s 15% of your income. Your proposed housing payment, then, could be somewhere between 26% and 35% of your income, or $1,820 to $2,450.

Down Payment

The bigger your down payment, the more house you can afford. Once you can put down 20%, you won’t have to pay for mortgage insurance. That frees up more cash to put toward principal and interest.

Credit Score

The higher your credit score, the more house you can afford for the same down payment. A higher credit score will get you a lower interest rate, and the lower your interest rate, the more you can afford to borrow.

Other Factors that Affect How Much House I Can Afford

Next, you’ll need to do some research. As long as you know your credit score, it’s easy to estimate what your monthly mortgage payment will be using a mortgage calculator. But how much will you pay for everything else?

Closing Costs

Closing costs, which will run you about 2% to 5% of the purchase price, will affect how much home you can afford to a greater or lesser extent depending on how you pay for them.

• If you pay closing costs in cash, and if that means you have a smaller down payment, you might not be able to buy as much house.
• If you need to finance closing costs by adding them to your mortgage principal, you might have to buy a commensurately less expensive house.

The best-case scenario is getting the seller to pay closing costs without increasing the purchase price. It may be hard to get this concession in a seller’s market, but it may be doable in a buyer’s market.

Property Taxes

Check the county assessor’s website and local real estate listings to get an accurate idea of the property tax rates in the area where you’re buying. Nationwide, rates range from 0.30% to 2.13% of the home’s assessed value. Assessed value may be lower than market value, thanks to homestead exemptions.

Homeowners Insurance

Homeowners insurance costs more in places where homeowners file more claims. These tend to be places with more crime or storms. A local insurance agent might be happy to give you an idea about prices in the area since you could become a future client. If you just want to ballpark it, the national average annual premium for a $250,000 home is about $1,100 (about $92/month).

Mortgage Insurance

Are you putting down less than 20%? Expect to pay mortgage insurance premiums for at least a few years. They’ll cost 0.17% to 1.86% per year per $100,000 you borrow, or $35 to $372 per month on a $250,000 loan.

If you’re getting a conventional loan with less than 20% down and will have to pay private mortgage insurance (PMI), try to minimize this expense. The larger your down payment and the better your credit score, the lower your PMI rate and the fewer years you’ll have to pay it for.

Flood Insurance

Some homes are in a special flood hazard area; this means you’ll probably be required to buy flood insurance. Other homes are in locations where lenders will not require you to buy flood insurance. However, you might want to purchase it anyway after investigating the area’s flood risks. You can get a flood insurance quote from the National Flood Insurance Program, but private insurers may be able to offer a better deal.

Homeowners Association Fees

Realtor.com says a typical HOA fee is $200 to $300 a month. Fees depend on how many amenities the community has, how many services it requires, and how much upkeep it needs. Local real estate listings can give you an idea about the homeowners association fees in the neighborhoods, condos or townhomes you’re interested in.

Home Maintenance

Home maintenance will cost money, and the larger and older the home, the more upkeep you’ll have to budget for. In a shared building, the HOA might take care of most maintenance. But if you’re buying a house, you’ll need to set aside money each month for the new roof you’ll need one day, the fresh paint on the exterior, the air conditioner repairs and all the other expenses of home ownership.

Budget 1% to 4% of your home’s value each year for home maintenance. You might not spend this amount each year, but you’ll spend it eventually.

Utilities

You’ll also need to estimate your future home’s utility bills for electricity, gas, trash and water. You might not be paying for all of these expenses where you live now, or you might be paying less for them because you’re in a smaller place than your future home will be. To get an idea of the costs, ask people who already live in the area where you want to buy.

Living Expenses

Now, factor in your other monthly expenses: gas, car insurance, health insurance, groceries, entertainment, pet stuff, kid stuff, retirement contributions, emergency savings, travel, streaming services and cell phone service. Lenders won’t consider these costs when they decide how much to lend you. You need to consider them to know what you can actually afford.

Cash Reserves

Loan requirements for cash reserves usually range from zero to six months. But even if your lender allows it, exhausting your savings on a down payment, moving expenses and fixing up your new place is tempting fate.

You’ll often hear that you should have three to six months’ worth of living expenses saved to cover emergencies. As a homeowner, you’d be wise to have six months to two years’ worth of living expenses saved. You never know when a global pandemic might wreak havoc on your ability to earn a living and pay for your home.

How the Loan You Choose Can Affect Affordability

The loan you choose can also affect how much home you can afford:

• FHA loan. You’ll have the added expense of up-front mortgage insurance and monthly mortgage insurance premiums.
• VA loan. You won’t have to put anything down and you won’t have to pay for mortgage insurance, but you will have to pay a funding fee.
• Conventional loan. If you put down less than 20%, private mortgage insurance will take up part of your monthly budget.
• USDA loan. Both the upfront fee and the annual fee will detract from how much home you can afford.

What to Do if You Want More Home Than You Can Afford

We all want more home than we can afford. The real question is, what are you willing to settle for? A good answer would be a home that you won’t regret buying and one that won’t have you wanting to upgrade in a few years. As much as mortgage brokers and real estate agents would love the extra commissions, getting a mortgage twice and moving twice will cost you a lot of time and money.

The National Association of Realtors found that these were the most common financial sacrifices homebuyers made to afford a home:

1. Cut spending on entertainment
2. Cut spending on clothes
3. Canceled vacation plans
4. Paid minimum payments on bills
5. Earned extra income through a second job
6. Sold a vehicle or decided not to purchase a vehicle

These are all solid choices, except for making only the minimum payments on your bills. Having less debt can improve your credit score and increase your monthly cash flow. Both of these will increase how much home you can afford. They will also decrease how much interest you pay on those debts.

Consider these additional suggestions for what to do if you want more home than you can afford:

• Pay down debt, especially high-interest credit card debt and any debt with fewer than 10 monthly payments remaining
• Work toward excellent credit
• Ask a relative for a gift toward your down payment, especially if you can demonstrate your own efforts toward becoming an excellent candidate for a mortgage

Two of the most common reasons for buying a home, according to the National Association of Realtors survey, were to have a larger home or to be in a better area. If you can manage to get both of those things upfront, you might not ever have to move.