How Much Home Can I Afford?

Home Purchase

Before you start looking at houses, it’s important to have an idea of how much you can afford. Several factors contribute to your monthly payments and overall budget. Elements like your down payment, credit score, monthly income, and interest rates all play a role in your housing costs.

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Whether you are searching for a starter home for yourself, investing in property with a partner, or buying a house for a family member, use this guide to calculate how much house you can afford. 

Factors That Affect How Much Mortgage You Can Qualify For

Several factors contribute to your housing budget and overall affordability. Make sure you account for each of these elements as you set a budget and determine what size house you can buy. 

  • Down payment: This is how much cash you provide up front for the home purchase.
  • Monthly income: Your lender will use this to determine the size of the monthly payment you can afford. 
  • Interest rates: With high interest rates, a larger percentage of your monthly payment will go toward interest instead of the principal.
  • Loan duration: Most mortgages either last 15 or 30 years. 
  • Loan terms: Decide whether you want a fixed-rate or adjustable-rate mortgage. 
  • Taxes and insurance: Your lender builds these extra costs into your monthly payment, which determines your home affordability. 
  • Private mortgage insurance: If your down payment is less than 20%, you might be charged an extra fee

Some buyers will also need to factor in whether they are buying a primary residence or investment property. Interest rates can be higher for buyers purchasing investment properties, which can skew your mortgage terms. 

The 28/36 vs. the 29/41 Rule

Both the 28/36 rule and the 29/41 rule represent how much financial experts recommend you pay on housing versus your total debts. With the 28/36 rule, you would spend 28% of your gross monthly income on housing and up to 36% of that income paying off your overall debts. The 28% housing cost factors into the total 36% rate. 

The 29/41 rule follows similar guidelines. With this rule, you allocate 29% of your total income to housing, and 41% to your overall debts. Different lenders follow different rules, so your lender might favor either one.

Using an example, if you earn $5,000 per month in gross monthly income, up to $1,450 can be used for housing costs. Up to $2,050 can be used to pay off total debt, leaving you with $600 to cover student loans and other debt.

Debt-to-Income Ratio

When you apply for a loan, your lender will go over your debt-to-income ratio (DTI), which is the amount of debt you pay monthly versus your income. Most lenders won’t approve an application if the DTI exceeds 36%, of which the existing rent or mortgage payment cannot be more than 28%. In some cases, a lender will approve a loan with a DTI of up to 43%.  

For example, using the gross monthly income level of $5,000 mentioned earlier, your maximum DTI could be $1,800 to meet the 36% threshold. Lenders will want to make sure housing accounts for around $1,400 of your debt payments (28% of your income), leaving you with $400 for other debts.  

Potential homeowners might be surprised by these calculations, but they are meant to be safeguards so you make your payments. Unfortunately, this often means that your home budget drops to meet these parameters. 

Calculating DTI

Follow these steps to calculate your DTI so you have an idea of your ideal monthly payments before you ever meet with a lender. 

  • Start with your gross monthly income. This is the amount you take home before taxes. If you receive an annual salary, divided by 12. 
  • Multiply your gross monthly income by 0.36. This will provide an estimate of your maximum monthly payment. 
  • Add up your recurring debts. This includes your student loans, car payments, and other costs. 
  • Subtract your monthly debt payments from your maximum DTI calculation. This is how much you have left over for housing. 

Here are these calculations in action: someone who earns $120,000 a year brings home $10,000 per month and their maximum DTI is $3,600. If that person has a $300 monthly student loan payment and a $500 monthly car payment, then they have $2,800 left for a mortgage. 

Types of Loans

Along with determining a budget for your home, you can also look into different loan options that can make housing more affordable. Here are a few loan types to consider.

  • FHA loans are designed for first-time home buyers and require smaller down payments. You could buy a house for as little as 3.5% down. 
  • VA loans are designed to support active and veteran members of the United States military. You could buy a house without a down payment and without needing private mortgage insurance. 
  • USDA loans are meant to support people buying houses in rural areas. This is another loan where you might not need a Down payment. 
  • A stock loan provides financing based on your shares on the global stock exchange. This allows you to gain access to liquid cash without disrupting your investment portfolio. In this case, the stocks work as collateral for the loan. Learn how stock loans work and use the stock loan calculator to understand your borrowing options. 

If you do not qualify for any of these loan programs, you may be able to secure a conventional loan through a private lender. This is one of the most common ways to get a mortgage. 

How To Calculate How Much House You Can Afford

You don’t need a financial background to understand how much house you can afford. Follow these steps to get a rough estimate:

  • Calculate your DTI: this will give you a monthly payment amount based on what lenders will approve.  
  • Look up home prices in your area. See which home sizes meet your needs. 
  • Estimate your down payment: you can automatically subtract this from your home price. 
  • Use an online calculator. A mortgage calculator is the easiest way to take a home price and estimate monthly payments. 
  • Compare online estimates to your DTI. See how close your ideal home is to your DTI range. 

These steps might require a little trial and error, but you should get a home range to guide your search. You can also consult with a lender to see what size loan they will approve for your home purchase.  

Tips for Acquiring an Affordable Home

If you are worried about finding homes in your price range, take steps to find more affordable options that can work for you. Here are a few options to consider:

  • Move to a lower cost of living area. You might not be able to live in your dream neighborhood just yet. 
  • Factor in hidden costs like homeowners association fees. This will streamline the loan process. 
  • Set aside a home improvement budget. You don’t want to be caught off guard by unexpected repairs
  • Consider investing in a fixer-upper. You can buy an affordable home and repair it over the years. 
  • Set realistic expectations. You might need to buy a smaller house if it means you can become a homeowner. 

Additionally, save room in your budget for furniture. This will allow you to design your home in a way that makes you feel comfortable. 

What Salary Do I Need To Buy a 500K House?

Download the Free Stock Loan Calculator

Your portfolio’s value can be unlocked even if you don’t sell a single share in the open market.

If you haven’t checked it out already, here is a free stock loan calculator to help you size out a loan for your shares.

Simply enter a symbol and the number of shares you own, and you’ll see a potential loan amount that we can fund quickly.

Download the free Stock Loan Calculator now

Every buyer has a unique financial picture, which means there’s no easy answer to this question. Someone who has $100,000 for a down payment will need a lower salary to buy a $500,000 house than someone who doesn’t have a large down payment saved. Even macroeconomic trends like interest rates can have an impact. When interest rates are higher, you will need to earn more to buy a house. 

In one example, a buyer had a 20% down payment on the $500,000 home, which means they took out a $400,000 loan. With interest rates at 6.5%, the buyer would have needed to earn $91,000 annually.  

If you aren’t sure how much house you can afford, meet with the financial advisor to go over your options. They can help you set a budget that is reasonable and will be appealing to mortgage lenders.


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