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- The best way to determine how much house you can afford is by working backward from your current budget.
- Look at how much you spend each month and see how a mortgage payment could fit into that.
- Don't forget about other costs like property taxes, insurance, home maintenance, and repairs.
Figuring out how much house you can afford isn't always as straightforward as it seems. Between mortgage preapprovals and one-size-fits-all rules of thumb, it's easy for homebuyers to unwittingly overspend and end up with more house than their budgets can handle.
The best way to a homebuying budget is to take a personalized approach, looking at what your budget can realistically handle without sacrificing other wants, needs, and financial goals. Here's how you can do that.
Understanding your homebuying budget
Key factors that determine affordability
How much house you can afford will be determined by:
- Your income: The amount of money you have coming in every month will directly impact how much you can afford to spend on a mortgage payment.
- Monthly expenses: Your mortgage lender will look at your debts when determining how much to approve you for, but you should also consider your other regular expenses, like food, utilities, savings, or entertainment.
- Current mortgage rates: The lower your mortgage rate, the more house you can afford. Even a small change in rates can impact the size of the mortgage you can borrow.
- Available savings: You'll typically need to make a down payment when you buy a house (unless you qualify for a zero-down mortgage like a VA loan). Making a larger down payment means you'll be borrowing less money, resulting in a lower mortgage payment. You'll also need to pay closing costs.
- Your creditworthiness: Lenders look at your credit history, debts, and assets to determine how risky a borrower you are. If you have a strong financial profile, you may be able to borrow more money or get a lower interest rate.
Where you live can impact home affordability
How much house you can afford depends a lot on where you live. For example, in our cost of living comparison, Business Insider found a wide variation in median mortgage payments across the country. West Virginia has the lowest median monthly payment of $1,208, according to U.S. Census data. By contrast, Washington, D.C. has the highest, with a median payment of $3,001.
If you buy in a popular city or metro area, home prices are likely to be higher, resulting in a larger monthly payment. Mortgage rates also vary by state, so you could pay more to borrow if you live in a place with a higher cost of living. If your area has high property taxes or homeowners insurance rates, that will raise your costs, too.
The neighborhood you choose to live in can also impact affordability. Some communities have homeowners associations, which come with regular HOA dues.
The 28/36 rule in homebuying
The 28/36 rule is a popular guideline that can help homebuyers figure out how much house they can afford. To follow this rule, homebuyers should aim to spend no more than 28% of their gross monthly income on housing costs, and a maximum of 36% of their income on all their debts combined (including housing costs).
This rule can get you in the ballpark of what a reasonable homebuying budget might look like, but try to avoid relying solely on rules of thumb like this.
Brian Walsh, CFP and head of advice and planning at SoFi, says that guidelines like this don't account for different budget needs or levels of debt. He also warns that they can tempt you to overspend.
"I think those can be helpful to set context, but the problem is no two people are the same," Walsh says.
Calculating your debt-to-income ratio (DTI)
A lender will look at your debt-to-income ratio when determining how much you can afford to borrow. Your DTI measures how much you pay each month toward debts you owe relative to your gross monthly income. So, if you spend $500 a month on credit card and auto loan payments and your monthly pre-tax income is $2,000, your DTI is 25%.
On a conventional mortgage, the maximum DTI you can have varies depending on your situation and lender, but 50% is generally the highest acceptable ratio. However, that doesn't necessarily mean that a mortgage fits into your budget as long as your DTI doesn't exceed that threshold. Follow the steps below to set a budget that considers your full financial picture, not just your debts.
How to calculate how much house you can afford
Step 1: Assess your monthly income
First, you need to know how much money you're working with. If you have a single source of steady income, this should be relatively easy.
If your income varies from month to month, try to establish a baseline for what your earnings typically look like (but be sure to have a plan for how you'll pay your mortgage if you have a month where you earn less than expected). Also, pay attention to how your income has trended over the last few years and whether you think it's likely to increase, decrease, or remain steady. This can help you evaluate how likely it is that you'll be able to keep up with your mortgage payments in the future.
Step 2: Evaluate your monthly expenses
Take a holistic look at your current budget and see how a mortgage payment could fit into that.
"What we encourage people to do is really start with their budget and work backwards," Walsh says.
This means looking at what you're currently spending on housing and how that fits in with your other expenses, including household needs, retirement and other savings, debt payments, childcare costs, and everything else.
At the end of the month, do you have money left over? Or are you frequently tapping savings or credit cards to cover regular costs? If your budget is already stretched tight, becoming a homeowner is likely to exacerbate that.
Step 3: Factor in down payment savings and assistance
The more money you put down, the less you have to borrow, resulting in a smaller monthly payment. Making a big down payment can help you snag a lower interest rate as well, which also can make your mortgage payment more affordable.
If you don't have a lot of money saved for a down payment, that doesn't necessarily mean you can't afford to buy a house. It's possible to get a conventional mortgage with a down payment of just 3%. And if you qualify for a VA or USDA loan, you might not need to make a down payment at all. You may also be able to get down payment assistance to help you get into a home.
On top of your down payment, you'll need to pay closing costs, which can cost between 2% and 5% of the loan amount.
Step 4: Consider mortgage interest rates
When mortgage rates are low, your buying power is increased. Say you're looking to spend no more than $2,000 on a monthly mortgage payment. If current 30-year mortgage rates are hovering around 7%, you could borrow a mortgage of around $300,000. But if rates drop to 6%, you could borrow almost $35,000 more and keep that same monthly payment.
No matter how rates are currently trending, shopping around can help ensure you get the best overall deal. Rates can vary quite a bit from lender to lender, so getting quotes from at least three different mortgage lenders can save you a lot of money in the long term.
"Small differences in the loan that you secure, whether it be interest rate, closing costs, origination fees, different things like that, they can really, really add up to big numbers," Walsh says.
Step 5: Figure out your other costs
When you have a mortgage, you won't just be responsible for paying the principal and interest each month. Your mortgage payment will also include property taxes, homeowners insurance, and mortgage insurance (if applicable). If you live in a community with a homeowners association, you'll need to factor in that cost as well.
- Property tax rates are set by local governments, so how much you'll pay each month depends on exactly where you plan to buy and the value of the home. According to the U.S. Census Bureau, the median property tax paid in Alabama is $718, which would add less than $60 a month to your mortgage payment. But in New Jersey, it's $8,897, which would cost around $740 a month.
- The average cost of homeowners insurance also varies depending on where you're located and your home's value. In 2021, the average homeowners insurance premium was $1,411, according to the National Association of Insurance Commissioners. This would add just under $120 a month to your mortgage payment.
- Mortgage insurance will be added to your monthly payment if you make a down payment that's less than 20% on a conventional loan. Freddie Mac says this can cost between $30 and $70 for every $100,000 you borrow.
- HOA dues can range from $200 a month to thousands of dollars a month, depending on the HOA's budget and the amenities it offers.
Using a mortgage calculator to find out how much you can afford
Our simple mortgage calculator can help you get an idea of how much house you can afford. Plug in the typical home price in your area, how much money you have for a down payment, and an estimate of your mortgage rate to see how much that house could cost you on a monthly basis.
Mortgage Calculator
- Paying a 25% higher down payment would save you $8,916.08 on interest charges
- Lowering the interest rate by 1% would save you $51,562.03
- Paying an additional $500 each month would reduce the loan length by 146 months
Tools and resources to help you calculate affordability
Home affordability calculators
Home affordability calculators can help give you an idea of what a good budget range might be for you, but keep in mind that many of these calculators rely on that same one-size-fits-all approach that can miss out on the intricacies of your individual budget.
Consulting with a financial advisor
Don't be afraid to seek out a professional opinion if you feel like you're in over your head. Working with a financial advisor can help you ensure that you're balancing your budget appropriately as you prepare for homeownership.
Common mistakes to avoid when determining affordability
Using preapproval to guide your budget
A lot of first-time homebuyers might assume that it's safe to set your budget based on what the lender says you can afford. But that's often not the case.
"Most of the time what someone would get preapproved for is much more than what they should actually be spending on a home," Walsh says.
When a mortgage lender takes its initial look at your finances and decides it may be willing to lend to you, it will issue a mortgage preapproval for a certain amount of money. Lenders determine how much they'll lend based on a borrower's DTI, but your actual budget likely includes a lot more than just your income and your debts. You'll also want to have money left over each month for groceries, to save, or to do fun things like go to the movies or take trips.
Not starting off on strong financial footing
"You should always have a solid financial foundation before you consider buying a home," Walsh says.
This means you'll at least want to have an emergency fund with between three to six months of living expenses saved up. This should be separate from your down payment savings.
You should also consider paying down your debts before becoming a homeowner, especially if you have a lot of high-interest debt. Not only will this make qualifying for a mortgage easier, but it will also give you more room in your budget for your mortgage and other homeownership-related costs.
Make sure you're not neglecting your other financial goals. Having sufficient retirement savings, for example, is extremely important. If owning a home would cut into the amount you're able to save each month, you may need to rethink your budget.
Ignoring maintenance and hidden costs
When you rent, the landlord takes care of a lot of your unexpected expenses. As an owner, you'll be on the hook for everything.
Be prepared to pay at least 1% of your home's value in maintenance and repair costs each year.
"If you don't plan for that, that can really be a silent budget killer where it comes up out of nowhere and you thought you were going to have spare money, but then now you don't," Walsh says.
Assuming homeownership is always the best option
You want to make sure you plan to stay in the home long enough to make buying a home worth it, Walsh advises. Though he says that homeownership can be beneficial for many people, it's not always the right choice for everyone.
"The challenge is there's costs to both buying and selling a home," he says. "So if you don't live in a home long enough to offset those costs, it can actually be a bad financial decision."
Experts often recommend not buying unless you plan to stay in a home for at least five years, but it can vary. Because home values usually rise over time, you'll gradually build equity in the home that can offset the costs you'll incur when you decide to sell. If you move too soon, you could end up spending more than you gained in home value.
How first-time homebuyers can improve affordability
First-time homebuyers often struggle the most with finding an affordable home. But there are some things you can do to make it easier.
Work on your credit
First, make sure your credit profile is strong. Paying down debt can improve your credit score, and it will also lower your DTI — two things that can help you get a better mortgage rate and lower your borrowing costs.
Consider a cosigner
If you can afford a monthly mortgage payment but are having trouble qualifying for a mortgage, you might have better luck getting someone to cosign the loan with you.
Make sure you both understand the risks of this, though. If you suddenly aren't able to pay the mortgage, the responsibility for the loan will fall to the cosigner.
Shop around
Don't go with the first lender that offers you a mortgage. Lenders all offer slightly different rates, and the only way to ensure you're getting the best rate available is to compare offers from a few different companies. Be sure to consider both rates and fees, since lender fees can impact how much cash you'll need to bring to the closing table.
The best mortgage lenders don't just offer low rates and fees. They also have other affordable features like low down payment loans or flexible credit requirements.
Check out first-time homebuyer programs
There are many opportunities for borrowers to get help with their home purchases thanks to first-time homebuyer loans and down payment assistance programs. A lot of mortgage lenders now offer assistance in the form of grants or loans that can give you the funds you need to get into a home. Your state's housing finance agency may also offer assistance.
Explore different loan types
The type of mortgage you get can also impact affordability. Government-backed mortgages, which include FHA, VA, and USDA loans, come with low or no down payment requirements and low rates compared to conventional mortgages.
If you have a good credit score and are looking to keep your down payment low, you might prefer a conventional loan, since they allow down payments of just 3%. But if you want access to the lowest conventional rates, you'll likely need to make a large down payment.
Consider a different city or neighborhood
If home prices are too high in your city, expanding your search area could help you find a more affordable home. You may find lower prices and more square footage just a few towns over. Ask your real estate agent what areas near you are more affordable.
Look at starter homes
As a first-time buyer, you might not be able to afford as large a house as you initially envisioned. Your budget may limit you to starter homes, which are smaller and often have only one or two bedrooms. Then, as you gain equity in your home and grow your income, you may be able to afford a larger home later on.
How much house can I afford FAQs
A common rule of thumb is to not spend more than 28% of your income on housing costs, but it's more reliable to look at your individual budget to see how much you can realistically afford.
The more debt you have, the less house you'll be able to afford. Mortgage lenders decide how much you can borrow based on how much debt you owe relative to your income.
With a 20% down payment, you'll avoid paying mortgage insurance, but you can qualify for a mortgage with as little as 3% down.
It's possible that you can still afford a house even with student loans, it just depends on how much income you have left over after paying your loans.
