How Much House Can I Afford?
How do we calculate affordability?
When you start to think about buying a home, you will need to figure out what kind of a house you can afford, what your monthly payments would look like, and how much you need to save to put toward a down payment. Affordability should be viewed from two perspectives: 1) the overall monthly payments, which include your monthly household expenses, mortgage payment. home insurance, property taxes, and any other financial considerations you may have, and 2) how lenders determine what you can afford to spend on housing. In this calculator, we took the general guidelines that lenders follow when calculating what a borrower can afford.
In our affordability calculator, we figure out what a reasonably affordable price for a home would be, based on your gross annual income before taxes, the down payment you plan to put toward your home purchase, your monthly expenses, and the mortgage rate you might be eligible for. In short, we take your overall expenses divided by your overall income. This ratio is known as the debt-to-income ratio (DTI). Your DTI determines how much you can comfortably afford, according to the definitions below.
Lenders typically consider your overall debt and your pretax household income to compute your debt-to-income ratio (DTI). This is the percentage of your monthly income that goes toward debts including mortgages, student loans, auto loans, minimum credit-card payments, and child support. A DTI of no more than 36% is considered affordable. Lenders also compute your current DTI by removing mortgage-related payments from the calculation. If the resulting figure is no more than 28%, it’s considered acceptable.
It is very important to estimate your debt and annual income precisely.
Your current monthly expenses are a key factor in determining how much you have available to spend on a mortgage. Take an account of all your monthly expenses. We recommend that you include all your monthly payments, such as auto loan payments, student loan payments, minimum credit-card payments, insurance, utilities, telephone bills, subscriptions, and groceries. It is also wise to include the amount that you typically set aside for savings to build an accurate estimate of your monthly expenses.
This is the amount you pay upfront toward your home purchase. Typically, the recommended amount is 20% of your purchase price. Under certain loan programs, a down payment amount may be as low as 3.5%. If you have served in the military, you may even be eligible for a down payment of 0%. The down payment you make will determine how much your monthly payment will be. You should take into consideration your financial situation and your financial plan, to figure out a down payment that best suits your circumstances. Adjust the down payment amount in our calculator to find how much of a home you can afford. Check out our Mortgage Guide for the lowdown on down payments.
Annual household income
This includes the entire amount you and your co-borrower earn, including salary, wages, tips, commission, and any other regular income, such as rental income, before taxes.
Annual property tax
Annual property tax is a tax that you pay to your county, typically in two installments each year. The amount of the property tax varies depending on where you live, and is usually calculated as a percentage of your property’s value. When you buy a home, you may have to pay a prorated amount of the property tax that depends on when you complete the home purchase. This will become part of your overall closing costs.
Homes You May Like
Based on your location, income, debt, and the type of loan you prefer, we are able to compute a price range for a home you could purchase. With this information, we can also search through the homes in our database and show you homes in your price range.
Lenders offer different loan programs. Common types of loan include 30-year fixed, 15-year fixed, and 5-year adjustable-rate mortgages (ARM). Your monthly mortgage payment will vary depending on the loan program you choose. You should compare and contrast different programs, to see which is most appropriate for your situation. A fixed-rate loan, such as a 30-year fixed-rate loan, will have a fixed rate for 30 years, or for as long as you own the property. Such programs are best suited to buyers who plan to stay for a considerable period and prefer to lock in a rate for the long term. A 5/1 ARM loan typically offers a lower rate than a 30-year fixed mortgage, but the rate is fixed only for the first five years of the loan term. Check out our Mortgage Guide to learn more about the pros and cons of different types of mortgages. It is important to discuss your loan options with your lender, to decide which option best suits your situation.
Mortgage rates are the rate of interest that is charged on a mortgage. Lenders determine the mortgage rates in most cases. Rates are fixed or variable, meaning that they either remain the same for the duration of the mortgage or vary depending on a benchmark interest rate. Mortgage rates are directly related to interest rates, and a rise or fall in interest rates will result in a rise or fall in mortgage rates.
In addition to the interest rate. several other factors determine the specific mortgage rate that a buyer will qualify for. Your location affects your mortgage rate, and may vary from 0.25% to 0.5% between lenders on any given day, depending on local laws, the competition for lenders, fees, and closing costs. Your credit score is another important factor in determining your mortgage rate. If you have a poor credit score, you may only qualify for a higher mortgage rate, because a lender can recoup most of the loan amount at a faster rate if the rate is higher. Borrowers with higher credit scores may qualify for a lower rate, because the risk that they may default on the loan is considered to be lower.
It is highly recommended that you obtain loan pre-approval when you are shopping for a home, so that you can put in an offer and subsequently lock in the rate for your home loan.
Monthly mortgage payment
We calculate your monthly mortgage payment based on the loan amount, interest rate, and the amount of your down payment. This payment includes principal and interest. In some situations, lenders may require you to create an impound account, which means that your monthly mortgage payment will include payments for property tax and insurance. If your down payment is less than 20%, you may be required to add private mortgage insurance (PMI).
When a bank evaluates your loan application, it looks at your current income and debt. However, your complete financial picture may include other considerations. It is your responsibility to take into account all your monthly expenses and any projected expenses, and to add these to the estimated monthly mortgage payment, if you want to ensure that you will be comfortable paying the mortgage you are being offered. It is also recommended that you include in your budget 1% of your property’s value, to pay for home maintenance and repairs.
Your credit score is calculated by one of the three credit bureau services: Experian, TransUnion, and Equifax. This score is one of the main things that lenders assess in order to determine what loan options, mortgage rates and mortgage terms they can offer you. A higher credit score is favored by lenders, because it suggests that a borrower is less likely to default on the mortgage. It is always a good idea to monitor your credit report and to ensure that it is in good standing. To find out what a good credit score is. and to learn how credit scores are calculated, check out our Mortgage Guide.
The annual percentage rate (APR) is a number designed to help you evaluate the total cost of a loan. In addition to the interest rate, it takes into account the fees, rebates, and other costs you may encounter over the life of the loan. The APR is calculated according to federal requirements, and is required by law to be included in all mortgage loan estimates. This allows you to better compare different types of mortgages from different lenders, to see which is the right one for you.
The affordability calculator we include here is intended for planning and educational purposes only. The assumptions made here and the output of the calculator do not constitute a loan offer or solicitation, or financial or legal advice. Please talk to a loan professional, lender, or your personal banker to estimate how much you can afford to pay for a home.