How much mortgage you can afford depends on several factors including your income, monthly debts, down payment, interest rate, and other ongoing expenses. Here are key points to consider:
- Income multiple: Typically, lenders allow you to borrow up to about 4.5 times your annual income, but this is not guaranteed and varies by lender
- Debt-to-Income Ratio (DTI): A common guideline is the 28/36 rule:
- Housing costs (mortgage principal, interest, taxes, insurance) should not exceed 28% of your gross monthly income.
- Total monthly debts (including housing costs, credit cards, loans) should not exceed 36% of your gross monthly income
- Monthly payment limits: For example, if you earn $3,000 per month, your mortgage payment should ideally be no more than about $900 (30% of income), and total debts no more than $1,290 (43% of income) under FHA guidelines
- Down payment: The size of your down payment affects how much you can borrow and your monthly payments. FHA loans allow down payments as low as 3.5% with credit scores above 580, but lower scores require higher down payments
- Other expenses: Property taxes, homeowners insurance, mortgage insurance, HOA fees, and utilities also impact affordability and should be factored into your budget
- Use affordability calculators: Online mortgage affordability calculators can estimate how much you can borrow and your monthly payments based on your income, debts, down payment, and interest rates. These tools provide rough estimates but lenders will do a detailed assessment
In summary, to find out how much mortgage you can afford, calculate your gross monthly income, subtract monthly debts, and apply the 28/36 rule to estimate a comfortable monthly mortgage payment. Then, consider your down payment and other housing costs to determine a realistic home price. Using online mortgage affordability calculators can help refine these estimates before applying for pre-approval with a lender.
