How Much House Can I Afford?

What goes into a monthly housing payment

Your mortgage payment is more than the loan itself. Lenders and budgets usually count:

• Principal and interest on the loan
• Property taxes
• Homeowners insurance
• Mortgage insurance, if your loan has it
• HOA dues, if the home is in an association

Taxes and insurance vary widely by location, so the same price can mean very different payments in two neighborhoods.

How lenders decide what you can borrow

Lenders look at your debt-to-income ratio (DTI): your monthly debts divided by your gross monthly income. They often look at two versions:

• Housing ratio: your future housing payment alone, compared with your income
• Total ratio: your housing payment plus car loans, student loans, credit card minimums and other debts, compared with your income

Each loan program and lender sets its own limits, and other factors, such as your credit, savings and down payment, affect how much room you get. The CFPB explains the calculation in What is a debt-to-income ratio?

A common rule of thumb is to keep housing costs near 28% of your gross monthly income and total debts near 36%. It’s a starting point for your own budget, not a lending rule. Many buyers qualify above those levels, and some are more comfortable below them.

Do your own math

A lender’s approval tells you the most you can borrow. Your budget tells you what you can live with. To set yours:

1. Start with take-home pay, not gross income.
2. Subtract fixed bills: car payments, insurance, childcare, phone, internet and subscriptions.
3. Set aside savings: retirement contributions, an emergency fund and any big goals coming up.
4. Plan for home costs renters don’t have, such as repairs, maintenance, higher utilities and yard care.

What’s left is the range where a payment feels comfortable. If it’s lower than your approval amount, shop at the lower number.

Estimate your price range

Once you know the payment you’re comfortable with, a loan officer can turn it into a price range based on current rates, your down payment and local taxes and insurance. The CFPB’s Owning a Home tools can help you explore options on your own first.

Ways to stretch your budget responsibly

• A larger down payment lowers your loan amount and may remove mortgage insurance.
• Paying down debt before you apply improves your debt-to-income ratio.
• Improving your credit may lower your rate and mortgage insurance cost.
• Down payment assistance may help with upfront costs. Your loan officer can tell you which programs are available in your state.
• A different loan program may fit better. Our guide to choosing the right home loan compares the options.

Get pre-approved before you shop. It turns these estimates into a real number and shows sellers you’re ready.

This article is general information, not an offer to lend or a commitment to lend. All loans are subject to credit approval, underwriting and property valuation. Belem Servicing LLC, NMLS ID #715386 (NMLS Consumer Access).

Sources

• Consumer Financial Protection Bureau, What is a debt-to-income ratio?
• Consumer Financial Protection Bureau, Owning a Home