5 critical action steps every first-time homebuyer must know
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By Mayra Paris
Updated: December 14, 2020 9:01 AM ET | Originally published: February 14, 2020

You may have heard that mortgage rates are dropping to historic lows in 2020. It’s true — rates dipped below 3% for the first time in July and have hit 14 record lows this year. But with lower rates have come more stringent vetting measures, with banks demanding higher down payments and better credit than before. If you’re worried about your application getting denied, our mortgage affordability calculator can help you figure out how much house you can actually afford to buy.

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1Add Your Info
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Gross income is the amount you receive before taxes and other deductions.

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In order to get the most accurate estimate, select the credit score that best represents your credit history.

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Not sure which loan type to choose? Go with a 30 Year Fixed Rate Loan, 90%+ of Americans do.

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If your cash down payment is less than 20% of your loan amount, we will automatically apply PMI to your results.

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In order to get the most accurate estimate, select the credit score that best represents your credit history.

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Not sure which loan type to choose? Go with a 30 Year Fixed Rate Loan, 90%+ of Americans do.

Money’s calculator results are for illustrative purposes only and not guaranteed. Money uses regional averages, so your mortgage payment may vary.

2See Your Results
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We try to keep our information current and accurate. However, interest rates are subject to market fluctuations and vary based on your qualifications. Calculator results assume a good credit score and factor-in regional averages; your actual interest rate may differ. Calculator results are for educational and informational purposes only and are not guaranteed. You should consult a licensed financial professional before making any personal financial decisions.

You can afford a house worth:

$---,---

with monthly payment of

$---,---

Monthly Breakdown

Mortgage Payment
Private Mortgage Insurance
Property Tax
Home Insurance
HOA / Condo Fees
3Lock in Your Rate

Rates For January 15, 2021

3.137%

Find your actual rate at Quicken Loans today!

View Your Rate For January 16, 2021

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How Our Home Affordability Calculator Works

Our home calculator can help you determine how much you can comfortably spend on a new mortgage while still being able to meet your existing obligations.

Income: First, you need to calculate your monthly income and that of your partner or co-buyer, if you have one. Include any sources of cash you may use to pay your mortgage, like salary, alimony, and any other income. This should be your gross income, meaning whatever you make before taxes are taken out.

Mortgage costs: Then, factor in how much you can put toward your down payment, state property taxes, and homeowners insurance premium (if you tell us in which state you will purchase, we’ll provide state averages for the last two.)

Total debt: Finally, calculate your monthly debts, including credit card payments, car payments, student loans, etc. Don’t include things like subscriptions, memberships, insurance premiums, and utility bills, which don’t appear in your credit report.

Calculating Debt-to-Income Ratio

Our mortgage affordability calculator uses the same metric banks do when they evaluate your loan application: your debt-to-income ratio. Banks use your DTI to gauge your ability to pay your mortgage and to help determine whether lending you money is a wise investment for them.

To calculate your DTI, divide your total monthly debt payments by your total monthly income and turn the result into a percentage. Here’s an example: if you make $5,000 a month and you pay $1,800 in debts, your DTI is 36% (1800 / 5000 = 0.36).

According to the Consumer Financial Protection Bureau, you should keep your debt-to-income ratio below 36%. However, the lower your DTI, the better your chances of being approved for a mortgage.

The 28/36 Rule

Lenders may also look at your ability to afford new debt by using the 28/36 Rule. This rule of thumb establishes that a household shouldn’t spend more than 28% of its total gross income on housing costs or more than 36% on total debts, including mortgage payments. This rule can also help you set a monthly budget and decide whether you’re in a good position to buy a house.

Let’s take a look at an example using the numbers above. For someone who makes $5,000 a month, following the 28/36 Rule means they should not spend more than $1,400 on housing costs every month. If you’re a renter, that’s the most you should spend on your lease to maintain good financial health. For a homeowner, however, that $1,400 should cover your monthly mortgage payment, as well as homeowners’ insurance premiums and property taxes.

It’s good to remember, however, that your DTI ratio and the 28/36 Rule are only one part of the bigger picture lenders look at to decide if they will approve your application. Your credit score, financial history, and other factors also come into play.

Special Loan Types

Another element that may change how flexible banks are when evaluating your loan application is the type of mortgage you’re requesting.

When it comes to FHA Loans, which are insured by the Federal Housing Administration, for most applicants with a credit score higher than 500 the maximum qualifying ratios are 31/43 — 31% for housing costs and 43% for total debt. In some cases, you may be allowed to have ratios as high as 40/50, provided your credit score is higher than 580 and that you meet additional compensating factors.

VA Loans are even more lenient to applicants. While the maximum DTI ratio is set at 41% in the general guidelines, the VA insures loans for people with higher ratios provided they meet other compensating factors. While it’s an important tool for lenders when evaluating your application, the DTI ratio won’t make or break your VA loan application by itself.

Getting the Best Interest Rate

A low debt-to-income ratio can help you qualify for a mortgage, but there are other things you can do to nab a great mortgage rate.

Improve Your Credit Score. Your credit score is a three-digit summary of your creditworthiness. Many lenders will approve or reject your loan application based on what your score says about your financial health. A very high credit score usually means a low interest rate, while a low score will get you a very high rate. One way to improve your score is to pay your bills on time every month. Another is to reduce your debt — which will also lower your DTI ratio.

Shop Around. Banks and lenders price risk differently and offer interest rates based on each applicant’s creditworthiness. To compare offers more accurately, you should request rate quotes from multiple lenders, preferably on the same day. For the best chances of getting a low rate, consider online lenders and credit unions, not just traditional banking institutions.

Increase Your Down Payment. Down payment requirements vary by lender and loan type, yet most applicants will need to put at least 20% down on their mortgage if they want to avoid paying for private mortgage insurance. While there are options if you don’t have that much money upfront, increasing your down payment could make the bank reduce your interest rate considerably. A higher down payment also reduces your monthly payment and DTI ratio.

Lock In Your Rate. Once you’ve picked a lender, locking in your rate guarantees the quoted interest rate won’t go up before you close on the mortgage. This mechanism gives you between 30 and 60 days to close on the loan with the interest rate you’ve locked in. However, since the market is bustling right now, lenders could take longer to close on loans, which you’ll need to take into consideration when requesting a rate lock.

FAQs

How much house can I afford based on my income?

Figuring out whether you can afford a house is pretty simple. The easiest way is to enter your information into our calculator. You’ll need to know your gross monthly income as well as your monthly debt, including credit cards and loan payments. We also ask for the down payment amount you can afford and the type of mortgage you are interested in obtaining. Entering this data into our widget calculates your debt-to-income ratio and suggests an affordable monthly mortgage payment. Based on this, the formula also calculates a home value so you can narrow your search.

How much house can I afford in my state?

The home value you can afford depends not only on your own financial state but also on where you live or plan to live. State property taxes are paid annually or biannually, depending on the state. Calculating how much property tax you can afford to pay every year and integrating that into your budget will help you determine how much home you can afford in your state. Other factors that determine how much you can afford are interest rates and closing costs, both of which vary by location.

Should I wait to buy a home?

It’s always hard to time the market, but it’s been especially difficult this year. The coronavirus pandemic and the resulting economic downturn has shaken up the real estate market. Even though mortgage rates are very low right now, there is no way to know whether they will fall even lower or start to move back up. However, the fact remains that interest rates are lower right now than they have ever been. If you are in a good financial position to purchase a home at the moment— meaning you have enough cash for a down payment, a good or great credit score, stable employment, and a low debt-to-income ratio — it may make sense for you to take that step now rather than later.

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