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If you can’t afford to pay cash for a house, you’re likely going to need a mortgage. As per the National Association of Realtors, a significant portion of homebuyers, specifically 28% of them, had to finance their home purchase in 2020–2022, so you’re not alone. Knowing how much house you can afford is essential before applying for a mortgage, especially as properties get more costly.
We’ll walk you through how to calculate how much home you can afford in more detail.
Buying a home is a major life decision, and one of the most important factors to consider is how much you can afford to spend on a monthly mortgage payment. This guide will help you understand the different factors that influence affordability and provide tips on how to calculate what a good monthly mortgage payment is for you.
Key Factors Influencing Affordability
Several key factors influence how much you can afford to spend on a monthly mortgage payment. These include:
- Income: Your income is the most important factor in determining affordability. The more you earn, the more you can afford to spend on a mortgage payment.
- Debt: Your existing debt obligations, such as student loans, car loans, and credit card debt, will also impact your affordability. The more debt you have, the less you can afford to spend on a mortgage payment.
- Down payment: The size of your down payment will also affect your affordability. A larger down payment will lower your monthly mortgage payment and give you more equity in your home.
- Credit score: Your credit score is a major factor in determining the interest rate you will receive on your mortgage. A higher credit score will result in a lower interest rate, which will lower your monthly mortgage payment.
- Location: The cost of housing varies significantly depending on location. In expensive areas, you will need to spend more on a monthly mortgage payment to afford a comparable home.
Calculating Affordability
There are several ways to calculate affordability. One common method is to use the 28/36 rule. This rule stipulates that your monthly housing expenses, which comprise your mortgage payment, property taxes, homeowners insurance, and other costs, cannot surpass 18% of your gross monthly income. Your entire debt payments, which include your mortgage payment and other debt obligations, shouldn’t be more than 336 percent of your gross monthly income.
For example, if your gross monthly income is $7,000, your monthly housing expenses should not exceed $1,960 (28% of $7,000). Your total debt payments should not exceed $2,520 (36% of $7,000).
Another way to calculate affordability is to use a mortgage calculator. A mortgage calculator will take into account your income, debt, down payment, and credit score to estimate your monthly mortgage payment.
Tips for Determining a Good Monthly Mortgage Payment
Here are some tips for determining a good monthly mortgage payment:
- Consider your budget: Your monthly mortgage payment should fit comfortably within your budget. Make sure you have enough money left over each month to cover your other expenses, such as food, transportation, and entertainment.
- Think about the future: Your income and expenses may change in the future. Consider how your monthly mortgage payment will fit into your budget if your income decreases or your expenses increase.
- Get pre-approved for a mortgage: Getting pre-approved for a mortgage will give you a good idea of how much you can afford to borrow. This will help you narrow down your search for a home.
- Shop around for a mortgage: Don’t settle for the first mortgage you are offered. Shop around and compare rates from different lenders to get the best deal.
Determining a good monthly mortgage payment is an important step in the homebuying process. By considering the factors that influence affordability and using the tips provided in this guide, you can find a monthly mortgage payment that fits comfortably within your budget.
Frequently Asked Questions (FAQs)
How much house can I afford with a 100k salary?
First of all, this will depend on where you are looking to buy. While housing prices have jumped nationally, they can still vary widely in terms of affordability when broken down by local area.
A general guideline when calculating how much home you can afford with your salary is to multiply your income by at least 2.5 or 3. This should give you an idea of the maximum housing price you can afford.
For example with a $100,000 annual salary you can afford a $300,000 house based on the maximum multiplier. However, you might be able to afford a more expensive home if you can secure a low interest rate or have enough money saved up for a large down payment.
What is a good income to buy a house?
Once more, the answer to this question will vary depending on your desired purchase location and type of real estate. But as a general guideline, you should try to make enough money each year to cover your mortgage payment three times over. By doing this, you can make sure that you have enough money each month to pay for your other bills.
For example, if you want to buy a house with a monthly mortgage payment of $2,000, you should aim to have an income of at least $6,000 per month.
How much down payment do I need to buy a house?
The type of mortgage you are receiving will determine how much down payment you need to purchase a home. With a traditional loan, you will normally be required to make a down payment of at least 2020% of the purchase price. On the other hand, some government-backed loans permit you to make minimal down payments as low as 3% or even 20%.
How can I improve my credit score to get a better mortgage rate?
There are several things you can do to improve your credit score, including:
- Pay your bills on time. This is the most important factor in your credit score.
- Keep your credit utilization low. This means using less than 30% of your available credit.
- Dispute any errors on your credit report.
- Become an authorized user on a credit card with good credit.
- Avoid opening new credit accounts.
Additional Resources
- Investopedia: How Much House Can I Afford?
- Forbes Advisor: How Much House Can I Afford? Affordability Calculator
- NerdWallet: How Much House Can You Afford?
- Bankrate: How Much House Can I Afford?
An essential step in the home-buying process is figuring out what a reasonable monthly mortgage payment is. Finding a monthly mortgage payment that comfortably fits within your budget can be achieved by taking into account the factors that affect affordability and by applying the advice in this guide.
How to Calculate How Much House You Can Afford
Let’s review some of the inputs for our calculator of home affordability, along with a few additional factors you should take into account.
The most obvious determinant of how much house you can afford is your income: the more you earn, the more you can afford, right? Well, not quite; it depends on how much of your income is already going toward paying off debt.
You might be making payments on a car loan, credit card, personal loan or student loan. Lenders will, at the very least, add up all of your monthly debt payments for the ensuing ten months or more. If your ability to make your monthly mortgage payment is greatly impacted by debts you are only paying for a few more months, they may occasionally even include those payments.
Many homebuyers are surprised to learn that lenders factor your future student loan payment into your monthly debt payments if you have a student loan in deferment or forbearance and you’re not making payments right now. After all, deferment and forbearance only grant borrowers a short-term reprieve—much shorter than your mortgage term will be.
The calculator doesn’t display your debt-to-income (DTI) 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 DTI: This only includes your housing payment. It is typically the case that lenders do not want you to spend more than 2031–2066% 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: This raises the amount you want to pay for a mortgage by the total of your current debts. Lenders desire that your back-end debt-to-income ratio (DTI) not exceed 2043% to 2050%, contingent on the kind of mortgage you are reapplying for and other aspects of your finances, such as your credit score and down payment.
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. Then, the amount of your proposed housing payment could range from $1,820% to $2,450, depending on your income between 20%26 and 20%35.
Should I Buy a Home Now or Wait?
If you’re asking yourself this, you’re probably contemplating whether or not mortgages and homes will become more affordable in the near future, or whether or not your finances will be more stable. However, the truth is that there might never be the ideal moment or house to purchase. So you have to ask yourself if the benefits of buying now outweigh the drawbacks. Here are some indications that now is a good enough time to buy:
- You are able to pay your property taxes, homeowners insurance, and mortgage comfortably.
- If applicable, you can also afford homeowners association dues and mortgage insurance comfortably.
- There is no reason for you to fear that your income will be lost.
- There’s no reason to believe that your expenses will suddenly increase.
- You anticipate being able to stay in one location for a minimum of five years.
- After your down payment, closing costs, and moving expenses, your savings won’t be completely depleted.
- You possess the necessary resources—time, knowledge, or cash—to handle home upkeep and repairs.
Here are some indications that you might want to wait:
- Despite your approval for a mortgage, there isn’t any room in your budget for the monthly payments when added to your other costs.
- Your coworkers are murmuring about layoffs
- You have tens of thousands of dollars in consumer debt
- In not too distant a future, you might find yourself relocating for a new career, a new relationship, or a change of scenery.
- You don’t have enough emergency savings to last more than three months, and you are currently unable to take on any new obligations.