How much house can I afford?
The house you can afford largely depends on your income and your current debt load.
You should generally aim to spend no more than 28% of your monthly pre-tax income on a mortgage payment and no more than 36-43% on total debts (including mortgage and housing costs). This is often known as the ‘28/36 rule.’
What does that actually look like in terms of a home price range? You can use the calculators above to find out.Verify your home buying budget. Start here
Three home affordability calculators and how to use them
There are three home affordability calculators above that can help you estimate your home buying budget in different ways:
- By home price – Found a home you like? Use this calculator to see if you can afford it
- By income – Tell us your annual income, your existing monthly debt load, and your down payment amount. We’ll tell you how much you can probably borrow and the value of the home you could buy
- By monthly payment – Enter the amount you’re comfortable paying for your mortgage each month and the size of your down payment. We’ll tell you the sum you can likely borrow and the price of the home that will buy you
The calculators are pre-populated with today’s average mortgage rates from our lender network. But you can change that if you know what rate you’re likely to qualify for. Your interest rate will affect both your monthly payment and your total home buying budget.
Remember, budgeting is personal
Keep in mind that there’s no one-size-fits-all answer to the question, “How much house can I afford?.” Your overriding priority should be making sure you can comfortably afford the monthly payments.
Depending on your priorities, that could mean taking the largest possible mortgage for which you qualify. Or it could mean settling for a less costly house and a smaller loan.
So by all means use a home affordability calculator to estimate your budget. But when you want to get serious about buying, make sure you connect with a mortgage lender who can walk you through your options and help you set a realistic budget for your financial situation.
What determines your maximum home price?
You might think your savings alone determine how much house you can afford. But in reality, the amount you have saved for a down payment is only one of many factors lenders use to determine your home price range.
Some of the key factors that determine your home buying power include:
- Debt-to-income (DTI) ratio: Determines how large of a mortgage payment you can afford
- Credit score: Impacts your interest rate and home loan eligibility
- Down payment: The more cash you contribute upfront, the more home you can afford
- Income level: Your cash flow matters (though mostly within the context of your DTI)
Your mortgage interest rate also plays a big role in affordability.
Someone who gets a lower mortgage rate can afford a more costly home. Compared with a less qualified borrower, you’re either making a lower monthly payment for the same sized mortgage or the same sized monthly payment for a bigger mortgage.
It’s worth doing what you can to look good on these five points before you make a mortgage application. For example, even a small improvement in your credit score can make a big difference to your mortgage rate and help boost your home buying power.
Affordability and your debt-to-income ratio
Mortgage lenders use a shortcut to calculate mortgage affordability. They look at a number called your ‘debt-to-income ratio’ (DTI).
DTI shows your monthly debt burden as a percentage of your gross (pre-tax) monthly income. There are two components to your DTI:
|Housing expenses only
|Housing expenses and other monthly debts
Looking at your debt-to-income ratio helps lenders determine a) how much wiggle room you currently have in your budget, and b) how much mortgage you can afford with your existing cash flow.
Above, we mentioned the ‘28/36’ rule of thumb for determining affordability. In this formula, 28% is the target front-end DTI, while 36% is the target back-end DTI.
Front-end DTI: Your housing expenses
Your “front-end” DTI looks only at your housing costs compared to your income. As mentioned above, lenders typically want to see a front-end DTI of 28% or lower — meaning your monthly housing costs don’t exceed 28% of your monthly gross income.
Housing expenses that count toward your DTI include your mortgage payment, homeowners insurance, and property taxes, as well as private mortgage insurance and homeowners association fees if applicable.
Back-end DTI: Your total debts
Your “back-end DTI,” on the other hand, counts your mortgage and other existing debts against your income. In other words, this is a measure of your total monthly debt load to see how much house you can afford on top of your other financial obligations.
Lenders see 36% as a ’good’ back-end DTI, but often allow debt ratios as high as 43% or even 45% for mortgage qualifying.
Expenses that count toward your back-end DTI include housing expenses (listed above) as well as payments on installment loans (auto, student, personal loans …) and minimum credit card payments. You must also include things like child support and alimony.
Your DTI does not include living expenses that vary month-to-month; things like food, dining out, gas, utilities, cell phone bills, and so on. So do not add these to your other debts when calculating your DTI.
DTI budgeting example
Calculating your DTI can help you work backward to determine how much house you can afford.
For example, let’s say you earn $7,500 per month before taxes. And you currently pay $700 per month toward a car loan and minimum credit card payments.
If you’re aiming for an ‘ideal’ back-end DTI of 36%, you can spend a total of $2,700 per month on all your debts including your mortgage. ($2,700 is 36% of $7,500.)
Since you already spend $700 per month on existing debts, that leaves $2,000 per month for a maximum mortgage payment. Plug that number into the “By monthly payment” calculator above and you can roughly estimate your home buying budget.
Keep in mind that the lower your DTI is, the lower your mortgage rate is likely to be — and the higher home price you can afford. So, if possible, try to reduce yours before you apply.
Find your home buying budget
Our calculators can give you a good estimate of your home buying budget. But you won’t know those things for sure until you get preapproved by a lender.
Even then, you should get quotes from multiple lenders before you finally settle on one. Because such comparison shopping is the only way to make sure you get a great deal.
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By refinancing an existing loan, the total finance charges incurred may be higher over the life of the loan.