To determine what price house you can afford, lenders and affordability calculators typically consider these key factors:
- Income : Your gross annual or monthly income before taxes.
- Monthly debts : Recurring expenses such as car payments, credit card minimums, student loans.
- Down payment : The amount of savings you can put toward the home purchase.
- Interest rate : The mortgage rate affects your monthly payment.
- Other costs : Property taxes, homeowner’s insurance, and possibly HOA fees.
Common Affordability Guidelines
- The 36/43 rule is widely used: your monthly mortgage payment (including taxes and insurance) should be no more than 36% of your gross monthly income, and your total monthly debt payments (including the mortgage) should not exceed 43% of your gross income.
- For example, if you earn $3,000/month, your mortgage payment should be no higher than about $1,080, and total debts no more than $1,290/month
- The 28/36 rule is another common guideline: no more than 28% of your gross income on housing costs and 36% on total debts
How to Calculate
You can use online affordability calculators (such as Zillow, NerdWallet, Wells Fargo, Chase) where you input your income, debts, down payment, and estimated interest rate to get an estimate of the house price you can afford
FHA Loans
If you qualify for an FHA loan, the guidelines may be slightly different, typically a 31/43 rule, allowing a bit more flexibility with down payments and credit scores but possibly higher mortgage insurance costs
Summary
- Calculate your gross monthly income.
- Add up your monthly debts.
- Decide on your down payment amount.
- Use an affordability calculator or lender pre-qualification to estimate your maximum home price.
- Aim for a mortgage payment around 28-36% of your gross income and total debts below 43%.
Using these factors and tools, you can get a tailored estimate of how much house you can afford based on your financial situation
