Purchasing a new home can be a long, involved process that requires plenty of advanced preparation. Luckily, if you’ve found this blog, you’re already taking the first step: figuring out the ideal price tag.
In this guide, we’ll answer your questions – like “What mortgage can I afford?” or “What price house can I afford?” and “What house can I afford on 100k a year – as well as explore the income needed for a $200,000 mortgage, what a debt-to-income ratio is, and which variables impact your final mortgage approval amount.
While we’ll walk through each question and answer step-by-step, you can also get started figuring out your personal homebuying budget with our mortgage calculators.
How much mortgage payment can I afford?
It’s easy to fall down a house hunting rabbit hole. You start some speculative scrolling through a real estate website, and before you know it, it’s two hours later and you’re perusing million-dollar listings and renovated cathedrals. But are those properties right for you?
As they begin their house hunt, many people ask themselves, “How expensive of a house can I afford?” In reality a better question to ask yourself is, “What kind of home can I afford?” Expensive doesn’t always mean better – especially if a house you’re considering will stretch your budget near to breaking.
Maxing out your monthly budget just to pay your mortgage is not recommended. The first rule of house hunting is simple: don’t break the bank or sacrifice emergency savings to pay your mortgage.
As a general rule of thumb, you don’t want a home’s monthly cost to exceed more than 28% of your gross monthly income – however, budgets, income, and home prices can be more complicated than that. In order to figure out “How much can I afford to spend on a home” you’ll need to carefully review your debt-to-income ratio, your monthly living expenses, and your annual income.
If that sounds like a lot – don’t worry, we’ll go through each and every factor below.
Calculate your debt-to-income ratio
First, you’ll want to look at your debt-to-income ratio. This is a comparison of your gross monthly income – that is, how much you make pre-taxes – and your monthly debts.
In your income bucket, you’ll want to include all streams of income – including alimony, social security benefits or other retirement benefits, passive income, or any other source of income.
In your debt bucket make sure you cover any and all money you owe and pay on monthly – including alimony and child support. You’ll also want to include student loans, credit card payments, vehicle loans, your current mortgage payment if you have one, and medical bills.
Luckily, you don’t have to do the calculation yourself – you can enter all of this information into our Debt-to-Income Ratio calculator, and it will show what percentage of your income you pay in debts each month.
Review monthly living expenses
Once you have an overview of your monthly debt, you’ll want to determine your monthly expenses – this includes rent, utilities, subscription services, groceries, and miscellaneous bills like your cell phone bill. If you already have a monthly budget you use, it should be relatively easy to pull this number.
Then, add the sum to your monthly debt, and subtract it from your monthly gross income. What you have left over should give you a range to start narrowing down how much you can afford to spend each month on a mortgage.
The 28/36 rule explained
However, you don’t want to spend the entirety of your remaining monthly income on a mortgage – you’ll want to keep some money free to put in savings, for emergencies, and to account for other spending needs.
This is where what’s called the 28/36 rule comes in. The 28/36 rule is a general guideline recommended by financial professionals stating that households shouldn’t spend more than 28% of gross monthly income on housing expenses, and, maximum, should spend no more than 36% of gross monthly income on total debts – housing included.
Now that you know what the 28/36 rule is, take another look at your debt-to-income ratio. How much can you afford to add to it before you cross that 28/36 threshold? And do you want to max out that amount – knowing you may well incur other debts in the future?
As you consider these questions, you can begin to further narrow down how much you want to spend each month in a mortgage payment. That, in turn, can help you determine the total cost of the house you’re looking for. But remember, there’s more that goes into a mortgage payment than just principal. It’s often better to go for a house at the lower end of your budget than to be shocked by your mortgage payment once insurance, interest, and property tax are factored in.
How much house can I afford on my salary?
As you may have noticed, there are a lot of variables that go into creating a house-hunting budget. So if you want to know “How much house can I afford based on my salary?” The answer is…it depends. No two people’s circumstances will be alike. So even if you narrow down a salary amount or a home price – for example, “How much do you have to make a year to afford a $400,000 house?” or “If I make 100k a year how much house can I afford?”, the answer could be wildly different based on how much debt each individual has and their current monthly living expenses. Each individual will also have their own unique comfort level when it comes to a mortgage payment or budget. Some will be comfortable with a house that maxes out their mortgage budget, while others would prefer to stay on the lower end.
The down payment amount required and the loan program you qualify for will also play an important role in what kind of house you can afford. While 20% of the purchase price is often required to avoid paying private mortgage insurance (PMI), there are many loan programs that require a much smaller down payment – some as low as 3% down or zero-down.
How Much Home Can I Afford? We have a calculator for that.
Online calculators are available to give you a rough estimate of what you can afford. But to get an accurate budget based on your personal situation, you’ll want to speak with a licensed mortgage lender who can perform a preliminary assessment and tell you what you might qualify for.
How to calculate affordability
But just because you meet the requirements on paper doesn’t mean a house with that price tag will actually work – or that you’ll be able to secure a mortgage for that amount.
Lenders also calculate a loan’s affordability when considering whether or not to grant a mortgage for a certain amount. Here are a few things they’ll be looking for – which means these are also things you should consider carefully:
Savings
Lenders will want to know how much you have in savings, in particular, how much you have available for a down payment.
Credit rating
How is your credit score? Some home loans have a minimum credit rating requirement. Be sure to double check to ensure you qualify for the mortgage loan you have your eye on.
Summary
Of course, there are more items that go into a mortgage payment and housing affordability, such as interest rates, down payment amount, property tax, and more. Check out our other blogs to get the scoop:
Mortgage 101 blog
Making a Down Payment on a House
Find the right mortgage for you
Our attentive mortgage lenders can help you find the right mortgage to secure your dream home. Reach out!
FAQ
How do I budget for a house?
If you haven’t already, try to figure out how much you can afford to spend on a home based on your current living situation. Then, figure out how much you’ll need to have saved for a down payment, and how much you will need to set aside each paycheck to meet that goal within a given period of time. You can also determine how much you can afford to pay each month on a mortgage and begin setting that amount aside each month. And don’t forget to have some emergency savings set aside for when you finally get the keys to your first home – you never know when you’ll need to replace a roof, window, or fix a leaky pipe!
When should I start saving for a house?
It’s never too early to start saving for a house! If you plan to one day purchase a home, start saving now – the more you have available for a down payment, the less money you’ll owe and the faster you can pay off your future home. Saving enough ahead of time can save you significant money in the future.
How can I save for a house quickly?
If you already have some money set aside, you can try putting that amount in a high-yield product like a Certificate of Deposit (CD). The interest you can accrue using one of these products can really help boost your down payment savings.
I can’t afford a house - what do I do?
There are options available! Depending on your income level, and whether or not this will be your first home purchase, you may be eligible for programs like our Next Horizons Mortgage program, which offers down payment assistance, lower rates, and other benefits to qualifying homebuyers.
What are the upfront costs of buying a home?
You will need to have a down payment prepared, as well as money to cover a home inspection and other closing costs.
