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How much house can I afford?

A home purchase is a big commitment. To make sure you’re buying a home you can afford — both now and in the future — use a detailed home affordability calculator before beginning your search.

    How to use our home affordability calculator

    Our home affordability calculator will reveal how much you can comfortably afford (price-wise), as well as how much your monthly mortgage payment will be at certain price levels.

    To get a more comprehensive feel for the price range you should be shopping in, you might try inputting a variety of home prices, such as the minimum or maximum amount of money you’re willing to spend on a home.

    The calculator can also estimate how much you may pay in closing costs, as well as for private mortgage insurance (PMI) if required. To use the tool, you’ll need to have the following data on hand:

    • Household income: You’ll need an estimate of the income you take in as a household across the entire year.
    • Down payment: This is how much you plan to put down on the home. Keep in mind that if your down payment is less than 20% of the purchase price, you may have to pay PMI. 
    • Monthly debts: This is the total of all the debts you’re required to pay each month. It can include car and student loans, credit cards, and more.
    • ZIP code: Make sure you use the ZIP code of the neighborhood you’re considering buying in. This will be used to estimate your annual property taxes.
    • Loan term: There are several loan terms you can choose from — the most common being a 15-year loan and a 30-year one
    • Credit score: Your credit score will play a role in what interest rates you receive, as well as your monthly payment.
      Interest rate: You can use an estimate here, or leverage Credible to get several prequalified rates beforehand. It takes just one form and a few minutes.
    • Property taxes: This will be estimated based on the ZIP code you input, but if you know last year’s property taxes for a property you’re considering, you can enter it manually here.
    • HOA fees: If you’re buying a home in an area managed by a Homeowners Association (HOA), you can input the annual fees in this spot.
    • Homeowners insurance: Your home insurance premiums are also included in your monthly payment. Once you have a quote from an insurer, use that data to input your premiums her

     

    Understanding the 28/36 rule for home affordability

    Financial experts generally recommend the 28/36 rule when it comes to buying a home. This means:

    • You should spend no more than 28% of your monthly income on your housing payment
    • Your total debts — including your home loan payment — should fall under 36% of your monthly income

    Here’s an example: Say you make $6,000 per month. According to the 28/36 rule, your mortgage payment should be no more than $1,680 (6,000 x 0.28). When combined with your other debts (credit cards, car loans, etc.), it should fall under $2,160 maximum.

    Following this rule isn’t required, of course, but it will help ensure you’re buying a home you can comfortably afford, given your income and existing debts. It will also help ensure you’re not putting too much money into your home and leaving little for anything else (including emergencies).


    Learn More: First-Time Homebuyer? Here’s How to Get the Money for Your Down Payment

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    The factors behind how much home you can afford

    Lenders look at home affordability, too. Using several factors, they’ll assess whether the home you’re buying is something you can afford given your income and, on top of this, whether you have the funds to continue making your payments should you lose your job or see reduced wages.

    Here’s what lenders look at specifically when analyzing your application:
     

    Debt-to-income ratio

    Your debt-to-income ratio — or DTI — is a ratio that reflects how much of your income your existing debts take up. The gold standard is 43%, meaning your debts (including your new mortgage payment) make up no more than 43% of your income.

    Here’s an example: If you make $6,000 per month, and your car loan, student loans, credit cards, and new housing payments total $3,000/month, then you have a 50% DTI (6,000 / 3,000). You might have a hard time qualifying for a mortgage in this scenario.
     

    Credit score

    Your credit score reflects your payment habits and how you manage debt. The higher the score, the lower your interest rate will usually be, and vice versa.
     

    Cash reserves

    Lenders also look at your cash reserves, which include things like savings accounts, investment and retirement accounts, stocks, bonds, and more. These are liquid assets that can be used for your down payment and closing costs, as well as in an emergency to cover your mortgage payment.

    The amount of cash reserves you’ll need varies by lender and loan program, but it’s usually calculated in months of mortgage payments (i.e., you need at least six months’ mortgage payments in the bank).

    How to get your lowest mortgage rate

    The lower your mortgage rate, the more you stand to save — both on your monthly payment and over your entire loan term.

    For example, a 6.5% rate on a $300,000, 30-year loan means a payment of $1,896 per month and more than $382,633 in interest over the loan term. At a 6% rate, those numbers go down to $1,799 and $347,515.

    To get the lowest mortgage rate, you should:
     

    Lower your debt-to-income ratio

    Reducing your DTI can help you get a lower rate.

    To do this, there are three options:

    1. Take time to pay down your balances.
    2. Increase your income.
    3. Add a co-borrower to your loan. Their income may help lower your DTI.
       

    Bring up your credit score

    Increasing your credit score can help, too.

    This means:

    • Pulling your credit report and alerting the credit bureau of any errors
    • Asking for a credit line increase
    • Paying down your balances
    • Avoiding new credit card and loan applications
    • Becoming an authorized user on a high-credit person’s account
       

    Save up for a bigger down payment

    Stow away a little more cash for a down payment. If you can put more money down, it lowers the risk for the lender which can positively impact your mortgage rate. Be sure to keep enough set aside for emergencies, though.

    Once you’re ready to get started, use Credible to compare prequalified rates from our partner lenders. It takes only a few minutes and can help you save significantly in the long run.

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    FINANCIAL EDUCATION

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