Consumer Comeback Blog

How to Determine How Much House Can You Afford

Written by Jeffrey Trull

Figuring out how much house you can afford seems like an easy question to answer, but it can actually be quite complicated.

Sure, there are fixed costs like a monthly mortgage payment, but extras like insurance and taxes plus unpredictable expenses like repairs and maintenance make the calculations much more difficult.

Here’s how to break it all down and figure out how much house you can afford.

What are you comfortable with?

Before you get all tangled up in calculators, approvals, and other recommendations, go with your gut. Here’s a simple question to ask yourself: “What can I afford to spend each month on a house?” Starting there will give you a number to work off of and to compare with other assessments.

The easiest way to look at this is to take whatever you’re paying for housing now and find the sweet spot by adding or subtracting from that. Can you afford a few hundred dollars more than what you’re paying now, or are you already feeling pain from devoting a large portion of your income to housing costs?

Just remember: a monthly mortgage payment doesn’t add up to the total cost of homeownership. There are many more costs to consider, and factoring all of them will give you the true amount you can afford for both the price tag of the house and the monthly mortgage payments.

Extra costs

Since the cost of owning a home doesn’t end with your mortgage payments, you can’t simply swap your monthly rent payment for a mortgage payment of the same size. Here are some other costs you need to consider in addition to the monthly mortgage payment:

  • Down payment. You’ll need to pay some money down, with at least 10% recommended and even required for some lenders. Others recommend paying at least 20% down to avoid paying private mortgage insurance (PMI). A larger down payment will typically lower the monthly mortgage payment.
  • Insurance. Expect to pay about 0.5% to 1% of the mortgage loan amount in annual homeowners insurance premiums each year.
  • Property taxes. This varies widely, but is likely in the thousands of dollars per year.
  • Maintenance and repairs. This varies, but you’ll likely need to save money in anticipation that your house will need to be maintained and things like appliances and HVAC systems will need to be repaired or replaced.
Altogether, these extras add thousands of dollars both to the upfront and ongoing yearly costs, so don’t forget to include them.

Use a calculator

From home, the best way to get an idea of the mortgage you can be approved for is by using a mortgage calculator. This will take into account all the different factors that might be harder for you to estimate on your own.

Calculators offer different features, so check out this one on Zillow or this one on MSN Money. These calculators will ask for down payments, other monthly debts, taxes, insurance, and your credit score to determine about how much you can afford.

Interest rates are important for calculating the house you can afford, and they’re determined primarily based on your credit score. You’ll need a credit score of about 700 to get the best rates, so before you even apply for a mortgage, do all you can to raise your credit score to save money on interest.

Your income and monthly payment

When you’re applying for a mortgage, lenders will run the numbers with your financial information to determine the mortgage amount they’re willing to extend to you. Much of this is based on your debt-to-income ratios.

Your “front-end ratio,” which is the amount of your gross income paid to your mortgage, is typically capped at 28%.

Your “back-end ratio,” which includes total debt payments with your mortgage, shouldn’t exceed about 36% of your gross income.

Although you may be willing to put a larger portion of your salary towards the house, lenders won’t let you exceed certain limits due to the perceived increased risk that you’ll default on your loan.

Get pre-approved

Don’t rely on guessing to find out what size mortgage you can afford. Before you even start shopping for homes, get pre-approval for a mortgage. By going through the pre-approval process, you’ll know more definitively about the mortgage you can afford than from a pre-qualification. You’ll have a more solid price range for home shopping, and you’ll be ready to act when you’ve found the home you want rather than waiting for bank approval later.