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How much house can I afford? Top 9 tips for 2023

How much mortgage can I afford?

1. How much of a mortgage payment can I afford?

To figure out how much house you can afford, we look at your household income, your monthly debts (like car and student loan payments), and how much money you have saved for a down payment. As a home buyer, you should feel comfortable with how much your monthly mortgage payments are.

Even if your regular monthly debts and household income are pretty stable, unplanned expenses and spending can hurt your savings.

A good rule of thumb for being able to pay your bills is to have three months of payments, like your rent and other monthly bills, saved up. This will let you pay your mortgage even if something unexpected happens.

2. What effect does your debt-to-income ratio have on your affordability?

The DTI ratio is an important way for your bank to figure out how much money you can borrow. It compares your total monthly debts (like your mortgage payments, which include insurance and property tax payments) to your monthly income before taxes.

Depending on your credit score, you may be able to qualify at a higher ratio, but in general, your housing costs shouldn’t be more than 28 percent of your monthly income.

For example, your DTI is 28 percent if your monthly mortgage payment, including taxes and insurance, is $1,260 and your monthly income before taxes is $4,500. (1260 / 4500 = 0.28)

You can also multiply your income by 0.28 to find out how much money you should spend on housing. In the example given above, that would mean that a mortgage payment of $1,260 would be enough to get a DTI of 28%. (4500 X 0.28 = 1,260)

3. How much house can I afford with an FHA loan?

To figure out how much house you can afford, we’ve assumed that you might be better off with a conventional loan if you have at least a 20% down payment. But if you want to put down less than 3.5 percent, you could apply for an FHA loan.

The qualifications for FHA-backed loans are also less strict, which is something to think about if you have a low credit score. If you want to learn more about an FHA loan, you can use our FHA mortgage calculator.

Conventional loans can have as little as a 3% down payment, but they are harder to qualify for than FHA loans.

4. How much house can I afford with a VA loan?

If you were in the military, you might be able to get a VA loan. That’s a big deal, because most mortgages backed by the Department of Veterans Affairs don’t require a down payment. This is a big plus, and the NerdWallet Home Affordability Calculator takes it into account when figuring out how much you can afford.

Remember to choose “Yes” in the “Are you a veteran?” box under “Loan details.”

For more information on mortgage loans, visit 5 Ways to Increase Your Chances of Getting a Mortgage In 2022

5. What is the 28%/36 % rule and why is it important?

To figure out ‘how much house can I afford,’ use the 28 percent / 36 percent rule, which states that you shouldn’t spend more than 28 percent of your gross monthly income on home-related costs and 36 percent on total debts, which includes your mortgage, credit cards, and other loans like auto and student loans.

For example, if you make $5,500 per month and have $500 in existing debt payments, your monthly mortgage payment for your home should not be more than $1,480.

The 28/36 rule is a widely accepted starting point for determining home affordability, but you should consider your entire financial situation when determining how much house you can afford.

6. What factors influence ‘how much house can I afford?’

The following factors are important in determining affordability: 1) your monthly income; 2) cash reserves to cover your down payment and closing costs; 3) your monthly expenses, and 4) your credit report.

Income – is money that you get on a regular basis, such as your salary or money from investments. Your income helps set a baseline for what you can pay each month.

Cash reserves – This is the amount of money you have on hand to make a down payment and cover closing costs. You can use your savings, investments, or other funds.

Debt and expenses – are things you have to pay every month, such as credit cards, car payments, student loans, groceries, utilities, insurance, etc.

Credit profile – Your credit score and the amount of debt you owe affect how a lender sees you as a borrower. These things will help determine how much money you can borrow and what your mortgage interest rate will be.

7. How much can I afford to spend on a house?

Based on your situation, a home affordability calculator will give you a price range that makes sense. Most importantly, it takes into account all of your monthly expenses to figure out if you can afford a home.

But when banks figure out if you can pay for something, they only look at your current debts. They don’t take into account whether you want to save $250 a month for retirement or want to save more money because you’re having a baby.

8. How much house can I afford on my salary?

Want a quick way to figure out how much house you can afford if your family makes $40,000 a year? $60,000? or more than $100,000? Use a mortgage income calculator to examine different scenarios.

By putting in the price of the home, the down payment you plan to make, and an assumed mortgage rate, you can find out how much money you would need each month or each year, as well as how much a lender might approve you for.

The calculator also gives you an answer from a different point of view. For example, it can tell you how much money you need to make to buy a $300,000 house.

It’s just another way to get comfortable with the home buying power you may already have, or want to gain.

9. Your mortgage rate is where home affordability starts

You will probably notice that any calculation of how much a house will cost you will include an estimate of the interest rate you will pay on your mortgage. Lenders will determine if you qualify for a loan based on four major factors:

  1. Your ratio of debt to income, which we talked about earlier.
  2. How well you have paid your bills in the past.
  3. Evidence of a regular income.
  4. How much you’ve saved for a down payment and a safety net for closing costs and other costs you’ll have when you move into a new home.

If lenders think you are good enough to get a mortgage, they will price your loan. That means figuring out how much interest you will have to pay. Your credit score is a big part of what your mortgage rate will be.

If your interest rate is low, your monthly payment will also be low.

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Oliver Moore

Oliver Moore