How much house you can afford is directly related to the size and type of mortgage you qualify for. Understanding how much you can comfortably spend on a monthly mortgage payment is crucial during the homebuying process; particularly for first-time homeowners.
Read on for tips on figuring out your price range, and check out our mortgage calculator for a quick and easy estimate.
Home affordability calculator
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 a home is a decision that will impact your finances for years to come. To avoid winding up with a mortgage 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 and mortgage term
- Your gross monthly and annual income
- Your total monthly debt or monthly expenses, including credit card debt, student loan payments, car payments, child support, 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
- Homeowner’s association (HOA) and condo fees
Most homebuyers take out a conventional mortgage loan. These loans typically require a down payment of no less than 3% of the property value, a minimum credit score of 620, a debt-to-income ratio of 36% and a monthly payment that doesn’t exceed 28% of the buyer’s pre-tax income.
Lenders will also look at a buyer’s ability to deal with all the fees and upfront costs associated with buying a home, such as closing costs and insurance fees.
Keep in mind that there are other loan types you may qualify for that have fewer restrictions and provide other benefits. Our best mortgage lenders page provides reviews for different 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 give you the opportunity 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 while 43% should be allocated to total debt. Most loans require a 28/36 ratio. This makes FHA loans ideal for those who might have less income or a shorter credit history.
If your credit score is over 580, you may be allowed to have a ratio as high as 40/50 with this type of loan, as long as you meet other requirements.
Borrowers with a credit score of 580 and above could also pay as little as 3.5% as a down payment, lower than the typical 5% or higher with a non-FHA loan.
How much house can I afford with a VA loan?
While the maximum debt-to-income ratio is set at 41% in the general guidelines for VA loans, the VA backs loans for people with higher ratios provided they meet other requirements. VA loans don’t have credit score requirements (although the credit score will still affect the borrower’s interest rates) and borrowers can qualify for a 0% down payment.
How much house can I afford with a USDA loan?
USDA loan terms for qualifying rural areas are much more flexible than regular loans. They don’t require a down payment and can include the mortgage insurance fee in the loan. This means you can actually finance 102% of the home value and avoid paying this fee upfront.
Keep in mind, however, that there are parameters for income eligibility (borrowers must earn a maximum of 115% of the median household income) and for the price and size of the house itself. Even if you can afford a certain amount of money, the eligibility might be for a less expensive home.
In order to see these requirements in detail, you can go to the USDA website and look at the qualifying areas and income by county.
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. Money’s home affordability calculator above spits out estimates 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.
Factors that affect home affordability
Current mortgage rates have a direct impact on home affordability. When you sign your mortgage loan, the interest rate you agree to pay influences the cost of your monthly payments, the size of your down payment and the overall cost of your loan. When you’re shopping around for a house — and trying to decide how much you can afford to spend — having a solid grasp of your mortgage rate is vitally important.
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 one (typically 620 or higher) can lead to more favorable loan terms and make homeownership a more achievable goal.
The amount of money your household brings in each year is one of the main things lenders look at when you apply for a mortgage. 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 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 (DTI) ratio is a metric mortgage lenders use to determine whether to qualify you for a mortgage, and the size of the loan you can secure. (Hint: we have a calculator for that, too.) Managing your debt and keeping your DTI ratio within the average lender’s accepted rubric is essential for prospective homebuyers.
Property taxes and insurance
Property taxes and homeowners' insurance can add a sizable amount of money to your recurring home expenses. 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) too.
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.
Understand the 28/36 rule
Lenders may determine your ability to afford a new home by using the 28/36 rule. This rule states that:
- Housing expenses should be no more than 28% of your total pre-tax income. This includes your monthly principal and mortgage interest rate, home insurance, annual property taxes, and private mortgage insurance payments (PMI).
- Total debt should not exceed 36% of your total pre-tax income. This includes the housing expenses mentioned above as well as credit cards, car loans, personal loans, and student loans, so long as these monthly debt payments are expected to continue for 10 months or more. This does not include other monthly expenses such as groceries, gas or your current rent payments.
In concrete numbers, the 28/36 rule means that a borrower who makes $5,000 a month should not spend more than $1,400 on housing costs every month.
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 should cover your monthly mortgage payment, as well as homeowners insurance premiums and property taxes.
Check your credit score
It’s important that you request your credit report before you start the application process and find out your credit score.
Your credit score is a three-digit summary of your creditworthiness. Borrowers with high credit scores will typically be offered the lowest interest rates, while those with low scores will be offered the most expensive rates.
You can get a free credit report once per year from each of the three major credit bureaus. You may also access your credit report for free under certain conditions, for example, if you’re the victim of identity theft.
Additionally, thanks to the CARE Act, you can now access free weekly reports from the three major credit bureaus until December 2023.
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.
Lenders prefer borrowers with a DTI of 36% or less, and offer better interest rates to these applicants. You can calculate your DTI using Money’s debt-to-income ratio calculator.
Make a down payment
If you don’t qualify for a VA loan or a 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%.
Ideally, buyers should provide a 20% down payment on their home. In general, this:
- Lowers your loan-to-value ratio
- Reduces your monthly mortgage payment
- Qualifies you for a lower interest rate
- Buys you enough home equity to bypass 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, 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 methods must be undertaken over time, whereas others will immediately impact your mortgage application.
Lower your DTI
DTI is one of the most important factors that lenders consider when looking at 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 around $600 a month, your housing expenses can be $1,200. Also, if you already calculated all expenses on a house and get a certain number, say, $1,450, you should try and cut down your $600 monthly payments by $250 for a better chance at a loan.
Raise your credit score
There are several ways to improve your credit score. First, it’s important to 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.
If the information being reported is accurate, make sure to resolve any collections accounts, pay your outstanding debt on time every month and, if possible, reduce your overall credit card debt. The higher your credit score, the lower your interest rate.
Consider applying to 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 are insured by the Federal Housing Administration. 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.
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 are backed by the Department of Veterans Affairs and typically don’t require a down payment.
Qualifications vary depending on the period and amount of time you served. However, there are many ways to qualify whether you’re a veteran, active duty service member, reservist or member of the National Guard. There are also opportunities for members who were discharged.
To read more about the qualifications and process for getting a Certificate of Eligibility, visit the U.S. Department of Veteran Affairs.
And if you’d like to explore your VA loan options, visit our best VA loans page.
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 fall within specific geographical areas, generally outside the limits of major metropolitan centers. It must also be a primary residence with a relatively low cost.
If you are eligible, USDA loans have many benefits, including allowing you to build, rehabilitate, improve or relocate a dwelling as your primary residence to your new location.
Recent news on home affordability
- More Homebuyers Are Canceling Sales at the Last Minute
- As U.S. Home Values Hit $47 Trillion, Here's Where They've Surged the Most
- Housing Market Forecast: Will Home Prices Drop in 2023?
Home Affordability FAQs
How much house can I afford based on my salary?
What salary do you need to buy a $400k house?
How much house can I afford on a $70,000 salary?
How can I buy a house if my affordability is low?
Why is house affordability calculated before taxes?
Do you include all expenses when calculating house affordability?
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 a monthly bill, 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 gross income to get an idea of your DTI.
- Take into account 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.