How much mortgage payment can I afford?
To calculate how much house you can afford, we take into account a few primary items, such as your household income, monthly debts (for example, car loan and student loan payments), and the amount of available savings for a down payment. As a home buyer, you’ll want to have a certain level of comfort in understanding your monthly mortgage payments.
While your household income and regular monthly debts may be relatively stable, unexpected expenses and unplanned spending can impact your savings.
A good affordability rule of thumb is to have three months of payments, including your housing payment and other monthly debts, in reserve. This will allow you to cover your mortgage payment in case of some unexpected event.
How does your debt-to-income ratio impact affordability?
An important metric that your bank uses to calculate the amount of money you can borrow is the DTI ratio — comparing your total monthly debts (for example, your mortgage payments including insurance and property tax payments) to your monthly pre-tax income.
Depending on your credit score, you may be qualified at a higher ratio, but generally, housing expenses shouldn’t exceed 28% of your monthly income.
For example, if your monthly mortgage payment, with taxes and insurance, is $1,260 a month and you have a monthly income of $4,500 before taxes, your DTI is 28%. (1260 / 4500 = 0.28)
You can also reverse the process to find what your housing budget should be by multiplying your income by 0.28. In the above example, that would allow a mortgage payment of $1,260 to achieve a 28% DTI. (4500 X 0.28 = 1,260)
How much house can I afford with an FHA loan?
To calculate how much house you can afford, we’ve made the assumption that with at least a 20% down payment, you might be best served with a conventional loan. However, if you are considering a smaller down payment, down to a minimum of 3.5%, you might apply for an FHA loan.
Loans backed by the FHA also have more relaxed qualifying standards — something to consider if you have a lower credit score. If you want to explore an FHA loan further, use our FHA mortgage calculator for more details.
Conventional loans can come with down payments as low as 3%, although qualifying is a bit tougher than with FHA loans.
How much house can I afford with a VA loan?
With a military connection, you may qualify for a VA loan. That’s a big deal, because mortgages backed by the Department of Veterans Affairs typically don’t require a down payment. The NerdWallet Home Affordability Calculator takes that major advantage into account when computing your personalized affordability factors.
The 28%/36% rule – what it is and why it matters
To calculate ‘how much house can I afford,’ a good rule of thumb is using the 28%/36% rule, which states that you shouldn’t spend more than 28% of your gross monthly income on home-related costs and 36% on total debts, including your mortgage, credit cards and other loans like auto and student loans.
Example: If you earn $5,500 a month and have $500 in existing debt payments, your monthly mortgage payment for your house shouldn’t exceed $1,480.
The 28%/36% rule is a broadly accepted starting point for determining home affordability, but you’ll still want to take your entire financial situation into account when considering how much house you can afford.
What factors help determine ‘how much house can I afford?’
Key factors in calculating affordability are 1) your monthly income; 2) cash reserves to cover your down payment and closing costs; 3) your monthly expenses; 4) your credit profile.
- Income – Money that you receive on a regular basis, such as your salary or income from investments. Your income helps establish a baseline for what you can afford to pay every month.
- Cash reserves – This is the amount of money you have available to make a down payment and cover closing costs. You can use your savings, investments or other sources.
- Debt and expenses – Monthly obligations you may have, such as credit cards, car payments, student loans, groceries, utilities, insurance, etc.
- Credit profile – Your credit score and the amount of debt you owe influence a lender’s view of you as a borrower. Those factors will help determine how much money you can borrow and the mortgage interest rate you’ll earn.
How much can I afford to spend on a house?
The home affordability calculator will provide you with an appropriate price range based on your situation. Most importantly, it takes into account all of your monthly obligations to determine if a home is comfortably within financial reach.
However, when banks evaluate your affordability, they take into account only your present outstanding debts. They do not take into consideration if you want to set aside $250 every month for your retirement or if you’re expecting a baby and want to save additional funds.
How much house can I afford on my salary?
Want a quick way to determine how much house you can afford on a $40,000 household income? $60,000? $100,000 or more? Use our mortgage income calculator to examine different scenarios.
By inputting a home price, the down payment you expect to make and an assumed mortgage rate, you can see how much monthly or annual income you would need — and even how much a lender might qualify you for.
The calculator also answers the question from another angle, for example: What salary do I need 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.
Home affordability begins with your mortgage rate
You will probably notice that any home affordability calculation includes an estimate of the mortgage interest rate you will be charged. Lenders will determine if you qualify for a loan based on four major factors:
- Your debt-to-income ratio, as we discussed earlier.
- Your history of paying bills on time.
- Proof of steady income.
- The amount of down payment you’ve saved, along with a financial cushion for closing costs and other expenses you’ll incur when moving into a new home.
If lenders determine you are mortgage-worthy, they will then price your loan. That means determining the interest rate you will be charged. Your credit score largely determines the mortgage rate you’ll get.
Naturally, the lower your interest rate, the lower your monthly payment will be.
Source: nerdwallet.com ~ Image: canva.com