To determine how expensive of a house you can afford, you need to consider several key financial factors and use affordability guidelines commonly employed by lenders:
Key Factors Affecting Affordability
- Annual Income: Your total pre-tax income, including any co-borrower's income.
- Monthly Debts: Recurring debts such as car payments, credit card minimums, student loans.
- Down Payment: The amount of cash you can put toward the home purchase upfront.
- Interest Rate: The mortgage interest rate affects your monthly payment.
- Property Taxes, Homeowners Insurance, HOA Fees: These add to your monthly housing costs.
- Loan Term: Usually 15 or 30 years, which affects monthly payments.
Affordability Rules and Calculations
- Debt-to-Income Ratio (DTI): Lenders typically use a DTI ratio where your total monthly housing costs (mortgage, taxes, insurance) should be no more than about 36% of your gross monthly income, and your total monthly debts including housing should not exceed about 43% of your income
- 28/36 Rule: A common guideline suggests spending no more than 28% of your gross monthly income on housing expenses and no more than 36% on total debts
- Prequalification: Getting pre-qualified by a lender helps confirm how much mortgage you can get based on your financial profile
How to Calculate
You can use online affordability calculators (like those from Zillow, Wells Fargo, NerdWallet, Bankrate, or Chase) where you input your income, debts, down payment, and other details to get an estimate of your affordable home price and monthly payments
Example
If you earn $5,500 per month before taxes, applying the 28% rule means you should spend no more than about $1,540 on housing costs. Including other debts, your total monthly debt payments should ideally stay below $1,980 to meet the 36% DTI guideline
Summary
- Calculate your gross monthly income.
- Add up your monthly debts.
- Decide your down payment amount.
- Use a mortgage affordability calculator or lender prequalification to estimate your home price range.
- Ensure your monthly mortgage payment plus debts stay within 36-43% of your income for affordability and financial safety
This approach will give you a realistic estimate of how expensive a house you can afford without overextending your finances.
