How Much House Can I Afford?

Buying a home can be an exciting journey. It's one of the largest investments you'll make, and it's the key to building long-term wealth. Your first steps are to determine exactly how much house you can afford and to set a budget.

Many factors determine how much you can afford, including your credit score, the type of mortgage you choose, your down payment and your monthly income. Understanding how these factors determine what you can afford is essential, especially for first-time homebuyers. Use our mortgage calculator to get the information you need to start your homeownership journey on the right path.

In this guide, we’ll cover:

• How much home can I afford?
• How to calculate your home affordability
• Factors affecting home affordability
• Ways to improve your house affordability
• FAQs about home affordability
• Latest news on home affordability

How Much Home Can I Afford?

Purchasing property is a decision that will impact your finances for years to come. To avoid winding up with a home loan you can’t afford, calculate your monthly income and expenses carefully before you take the plunge.

How much house you can afford will largely depend on:

• Your loan amount, mortgage rate and loan term

• Your down payment

• Your gross monthly income

• Your annual income

• Your total monthly debt or monthly expenses, including credit card debt, student loan payments, car payments, child support, alimony and other expenses

• State property taxes, which are paid annually or biannually and vary by state

• Current mortgage rates and closing costs, which vary by location

• Homeowners association (HOA) and condo fees for the home you're purchasing

Most homebuyers take out a conventional mortgage loan. These loans typically require a down payment of no less than 3% of the property value if they are a first-time buyer or 5% if they are a repeat buyer, a minimum credit score of 620, a debt-to-income ratio (DTI) of 36% and a monthly payment that doesn’t exceed 28% of the buyer’s pre-tax income. However, some lenders will accept a lower credit score and higher DTI.

Lenders will also consider a buyer’s ability to pay all the fees and upfront costs associated with buying a home, such as closing costs and insurance fees. Your down payment also plays a big role. If you can come to the table with a large down payment, it can increase your buying budget (because you need to borrow less and can therefore go further up in price). The interest rate you qualify for — which relies heavily on your credit score — also factors in.

Keep in mind that you may qualify for other loan types with fewer restrictions and additional benefits. Our best mortgage lenders page features reviews of lenders that may meet your needs.

How much house can I afford with an FHA loan?

Depending on your current financial situation and your credit score, a loan insured by the Federal Housing Administration — known as an FHA loan — can allow you to purchase a home with fewer restrictions than a regular mortgage.

FHA loans feature maximum qualifying ratios of 31/43 for most applicants with a credit score higher than 500. This means that no more than 31% of your income should go to housing costs, and 43% to total debt.

You may be allowed to have a ratio as high as 40/50 if you have compensating factors. These are financial factors that reduce your risk of default and can include things like a particularly flush savings account, significant additional income, a very large down payment or an especially high credit score. With automatic underwriting, those ratios can climb to 47/57. This higher ratio makes FHA loans ideal for those with lower incomes or shorter credit histories.

Borrowers with a credit score of 580 or higher can also pay as little as 3.5% down, lower than the typical 10% required for scores below this threshold.

You should also be aware of the maximum FHA loan amounts, which change every year. For a single-family home, the maximum limit varies by county, ranging from $541,287 in low-cost areas to $1,249,125 in high-cost areas. Here's a look at the full scope of borrowing limits:

How much house can I afford with a VA loan?

While the maximum debt-to-income ratio is 41% under VA loan general guidelines, the VA backs loans for borrowers with higher ratios, provided they meet other qualification criteria. The VA doesn't establish minimum credit score requirements, but lender do, so your score will affect the interest rate you're offered. The biggest draw of a VA loan is that many borrowers can qualify for 0% down payment.

These loans are only available to active U.S. military members, veterans, reservists, members of the National Guard and surviving spouses. You’ll also need to meet certain days-of-service requirements to be eligible.

How much house can I afford with a USDA loan?

USDA loan terms for qualifying rural areas are more flexible than those for conventional loans. They don’t require a down payment and can include the mortgage insurance fee in the loan, which means you can finance up to 101% of the home's value and avoid paying the fee upfront.

Keep in mind, however, that there are income-eligibility parameters (borrowers must earn no more than 115% of the area's median household income) and parameters for the house's price and size. Even if you can afford a certain amount, you may only qualify for a less expensive home.

To see these requirements in detail, visit the USDA website and look at the qualifying areas and income by county. Generally, only rural and some suburban areas will qualify.

How to calculate your home affordability

Before you start scrolling through real estate listings, come up with a price range of what you can afford. A home affordability calculator provides a ballpark figure based on either your debt-to-income ratio or your estimated budget.

Once you’ve plugged in all your info, you’ll get an estimated number for the maximum amount you can pay for a house, plus your estimated monthly mortgage payment.

1. Know the factors that affect home affordability

Mortgage rates

The interest rate you qualify for plays a big part in your budget. It affects both your monthly payments and the loan's long-term costs.

Current mortgage rates will affect what rate you can get, but personal factors — like your credit score and down payment — will play even bigger roles. Generally speaking, the better your score and the more you put down, the lower your interest rate will be.

Affordability can also be influenced by whether you choose a fixed-rate or adjustable-rate mortgage, the length of your loan term and the type of mortgage product you use. VA and FHA loans, for instance, tend to have lower rates than conventional loans (because they have government backing that lowers lenders' risk), although you will have to pay other fees, such as the VA funding fee and a mortgage insurance premium on FHA loans, that can increase your overall costs. Short-term loans also tend to have lower interest rates.

Credit scores

Your credit score is another important factor in determining how much house you can afford. Credit scores influence everything from your interest rate to your approval odds — maintaining a good score (typically 620 or higher) can lead to more favorable loan terms and make homeownership more achievable.

You can check your credit score through several online sources, such as Credit Karma. You can get a free copy of your full credit report through any of the three credit bureaus — Experian, Equifax or TransUnion, or you can check with your bank or credit card issuer. Many will offer free credit score monitoring as part of their client services.

Income

The amount of money your household brings in each month is one of the main things lenders look at when you apply for a mortgage. Your lender will also want to see consistent income to ensure you can reliably make your monthly payments.

Remember, though, that just because you can get a loan doesn’t mean you should, and it’s your responsibility to take a look at your entire financial picture (and whether paying for the house you’re interested in is doable with your budget) before signing on the dotted line.

Home value

Home value influences purchase price, down payment requirements, loan amounts, property taxes, insurance costs and ongoing maintenance expenses. Carefully consider the long-term costs of owning each potential property you’re eyeing.

Debt-to-income ratio

The debt-to-income ratio is a metric mortgage lenders use to determine whether you qualify for a mortgage and the size of the loan you can secure. Not only do mortgage lenders have maximum DTIs you’ll need to fall under to qualify, but your DTI can also impact how much you’re able to borrow and the rate you get, too. Lower DTIs will likely get you more favorable terms.

Use this DTI calculator to understand what numbers you’re working with. If your DTI is too high to qualify, consider paying down debts or taking on extra hours or freelance work. You can increase your income while lowering your DTI.

Property taxes and insurance

Property taxes and homeowners' insurance can add a sizable amount of money to your recurring home expenses. You’ll usually pay a portion of them each month as part of your monthly payment (this is called “escrow”). The lower these fees, the lower your payment will be — and the bigger budget you’ll have.

In most cases, if your down payment is less than 20% of the home’s purchase price, you’ll be on the hook for private mortgage insurance (PMI). You also pay this monthly with your mortgage payment.

Homeowners association (HOA) fees

Some homeowners pay a mandatory monthly fee to their local homeowners association (HOA), which goes towards the maintenance and repair of shared areas (pools, landscaping, elevators and the like). If the house you want to buy has an HOA, don’t forget to factor this into your budget, too.

2. Don't overextend yourself

Make sure you can comfortably afford the monthly mortgage payments. A general rule of thumb is that no more than 28% of your pre-tax income should go toward housing costs, though this can vary by lender.

Lenders often use the 28/36 rule to assess a borrower's ability to afford the loan. Under this rule, housing expenses should take up 28% or less of your gross income. Your total debt payments, including credit card, other loans, and mortgage payments, should not exceed 36%.

In concrete terms, the 28/36 guideline means that a borrower earning $5,000 per month should not spend more than $1,400 on housing costs.

If you’re a renter making $5,000 a month, it’s a good rule of thumb to spend a maximum of $1,400 on rent. However, for a homeowner making the same amount, $1,400 (28%) should cover your monthly mortgage payment, homeowners' insurance, mortgage insurance and property taxes.

The 28/36 rule may help prospective buyers determine the housing payment they’re comfortable with. But many lenders will determine your ability to afford a new home by using a higher total debt limit of 50% for conventional loans and 43% for jumbo loans. FHA and VA loans will have different limits.

3. Check your credit score

Request your credit report and find out your credit score before you start the application process.

Your credit score is a three-digit summary of your creditworthiness. Borrowers with high credit scores are typically offered the lowest interest rates, while lenders offer higher rates to those with lower scores.

You can get a free credit report from each of the three major credit bureaus. You should access your credit report, for example, if you’re the victim of identity theft or you may want to periodically check it to ensure the information is correct. A CARES Act program that provided free weekly reports from the three major credit bureaus during the pandemic has been permanently extended, allowing you to check as often as necessary.

4. Calculate your debt-to-income ratio

Your debt-to-income ratio (DTI) compares how much debt you owe to how much pre-tax income you earn per month. It’s an important metric that lenders use to determine how much you can borrow — or if you can borrow at all.

Lenders prefer borrowers with DTIs below the maximum allowed and may offer better interest rates to those borrowers. You can input your information and calculate your DTI using Money’s debt-to-income ratio calculator.

5. Make a down payment

If you don’t qualify for a VA loan, USDA loan or other 0% down payment mortgage program, most buyers will have to give a down payment on their potential home. Conventional loans typically require a minimum down payment of 5% of the purchase price. However, it could be as little as 3% if you have a low DTI ratio, a high credit score and meet other requirements.

For FHA loans, the minimum is 3.5%. While not required, a 20% down payment is often ideal. This could:

1. Lower your loan-to-value ratio
2. Reduce your monthly mortgage payment
3. Qualify you for a lower interest rate
4. Help you avoid private mortgage insurance (PMI)

If you don’t have enough money for a 20% down payment, you may be able to refinance your mortgage down the road, remove PMI, and, depending on the real estate market, snag a better interest rate. (For more info on refinancing, check out our list of the best mortgage refinance lenders and our mortgage refinance calculator.)

Ways to improve your house affordability

There are several options to consider if you are struggling to afford the home you have your eyes on. Some steps take time, while others can affect your mortgage application immediately.

Lower your DTI

DTI is one of the most important factors lenders consider when evaluating borrowers. Lowering your DTI by paying off as much debt as possible is a good option if your DTI is too high to get pre-qualified for a reasonable interest rate (or to qualify at all).

An optimal DTI is 36% or below, including possible housing costs, but excluding current rent payments, if any. If your monthly income is, for example, $5,000, then you shouldn’t owe more than $1,800 per month.

If your current debt is about $600 per month, your housing expenses could be as high as $1,200. Also, if you have already calculated all the expenses for a house and come up with a certain number, say $1,450, you should try to cut your $600 monthly payments by $250 to improve your chances of getting a loan.

Reducing your debts is your best bet for lowering your DTI, but increasing your income can help, too. You may want to ask for a raise or take on a side gig to help with expenses.

Raise your credit score

There are several ways to improve your credit score. First, check your credit report from all three bureaus — Experian, TransUnion, and Equifax — for inaccuracies. If there are mistakes in your credit history, you can file a dispute with the credit agencies. They are legally required to address any inaccuracies promptly, which should improve your score.

If the reported information is accurate, resolve any collection attempts, pay your bills on time every month, and, if possible, reduce your overall credit card debt. The higher your credit score, the lower your interest rate and monthly payment.

Consider applying for federal loans

The type of mortgage you’re requesting will help determine a lender’s flexibility in evaluating your loan application. Loans insured by the federal government — such as FHA loans, VA loans and USDA loans — all have certain benefits that may help you afford the home you want.

FHA loans

The Federal Housing Administration insures FHA loans. This means that banks get paid even if you default on your mortgage, and so are likely to be more flexible with their credit and down payment requirements. Note that, in order to qualify for an FHA loan, the borrower must intend to use the house as a primary residence and live in it within two months after closing.

VA loans

Borrowers who have served or have certain military connections may qualify for a VA loan. VA loans are more lenient than conventional and FHA loans. They're backed by the Department of Veterans Affairs and typically don’t require a down payment.

Eligibility requirements depend on the period and amount of time you served in the military. However, there are many ways to qualify whether you’re a veteran, active duty service member, reservist or member of the National Guard. Discharged members also have opportunities.

To read more about the qualifications and process for getting a Certificate of Eligibility, visit the U.S. Department of Veterans Affairs. And if you’d like to explore your VA loan options, visit our best VA loans page.

USDA loans

USDA loans are backed by the U.S. Department of Agriculture and offer certain benefits that conventional loans don’t.

They’re designed to help finance homes in eligible rural areas. The desired property must be located in specific geographic areas, generally outside the boundaries of major metropolitan centers. It must also be a primary residence with a relatively low cost.

If you are eligible, USDA loans offer several benefits, including the ability to build, rehabilitate, improve, or relocate a dwelling as your primary residence to a new location. They also require no down payment.

Summary of Money’s guide to home affordability

How much house you can afford depends mainly on two factors: your eligibility for a mortgage loan and your actual budget when it comes to paying monthly bills, along with taxes and insurance. Remember these steps when you’re getting ready to make your home purchase:

• Calculate your monthly debt and compare it to your monthly gross income to estimate your DTI.

• Consider other monthly expenses, such as utilities and groceries.

• Save up for a down payment.

• Consider all your loan options, such as FHA and VA loans.

• Use a mortgage calculator to avoid any surprises.