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How Much House Can I Afford?

Taking the step into homeownership will likely be one of the biggest financial decisions of your life. The weight of homeownership makes it imperative to choose the right-sized house at the right price based on your unique financial circumstances.

As a homebuyer, you will likely be financing the purchase of your home through a mortgage. The recurring payments you make on your mortgage will last years, even decades, and will command a significant portion of your monthly income.

So, what determines how much you pay each month for your mortgage? There are a number of factors that weigh in on that, including your credit score, monthly income, and the size of the down payment you make when closing. Then there are other factors like the location of your home, which determines tax rates, and the condition it is in.

If you take on more house than you can afford and have to stretch your budget thin to meet monthly mortgage payments, you open yourself up to a few risks. Your credit score could get dinged, you may not have enough money to meet other payments like those for your credit card, or worst of all, you could fall victim to foreclosure.

Instead, you want to purchase a home that is within your financial comfort zone so that monthly mortgage payments are easily budgeted for and paid without stress.

To do this, utilize True Quote Mortgage’s home affordability calculator that will let you know how much house you can afford based on your personal finance specifications.

Calculating How Much House You Can Afford

Before you can get an idea of how much house you can afford by using True Quote Mortgage’s home affordability calculator, be sure to have the following on hand:

  1. How much you earn each month, or your gross monthly income. You should take into account all revenue streams like investments or side-hustles. If you are applying with a partner, include his or her gross monthly income as well.
  2. Housing costs and your anticipated down payment. For your housing costs, include things like property taxes, homeowner’s insurance, and estimated mortgage rate and terms.
  3. All monthly expenses, including things like credit card and student loan payments, or pet insurance costs.

Once you have all of that handy, you can input these figures into True Quote Mortgage’s home affordability calculator and better understand how much house you can afford.

Keys to Securing the Best Possible Interest Rate

If you are using a mortgage to buy your home, than the interest rate you get on that mortgage could make a serious financial difference you.

A mortgage rate on the higher side could lead to you spending tens of thousands dollars extra over the life of the home loan. Whereas a low interest rate could free up those dollars to be invested or stowed away in a college savings account.

A few factors will determine the eventual interest rate you secure, including:

Credit Score

You should have a pretty good idea of what your credit score is before applying for a mortgage. A very good to excellent credit score will likely get the best interest rate, while a poor credit score will lead to an unfavorable mortgage interest rate. It is also important to review your credit report for incorrect or negative marks.

Debt-to-Income Ratio

Your debt-to-income ratio (DTI) is essentially how much you pay in debt payments each month compared to how much you make each month. Lenders do not want to provide a mortgage to someone with a high DTI, and generally won’t consider someone with a DTI higher than 43%. To calculate your DTI, add up all monthly debt payments, not general monthly expenses, and divide that sum by your gross monthly income.

Down Payment

By making a bigger down payment, you will likely secure more favorable mortgage terms because you are mitigating lender risk. The bigger your down payment, the lower your loan-to-value ratio (LTV), and that’s what a mortgage lender wants to see before giving you a great mortgage rate. Any down payment that is 20% or above the total loan size is seen as ideal. 

Following the 28/36% Rule

One financial term you may have heard in the past is the 28/36% rule, and it is an important one to remember when looking to buy a home. Financial experts recommend that no more than 28% of your gross monthly income should be used for monthly housing expenses, while no more than 36% should be used on total debt.

Housing expenses include things like monthly mortgage payments, whereas total debt should include all monthly debt payments like those on student loans, credit cards, and auto loans.