One of the biggest questions on your mind is likely: “How much house can I really afford?” This is a smart question and the answer depends on a few key factors.
Here’s what to consider before setting your budget:
1. Your Monthly Income
Mortgage lenders typically use your gross monthly income (before taxes) to determine how much you can afford. A good rule of thumb is to keep your housing expenses under 28% of your gross income.
2. Your Monthly Debt
Lenders look at your debt-to-income (DTI) ratio. This includes car loans, credit cards, student loans, and other debts. In most cases, lenders prefer a DTI under 43%, including your new mortgage payment.
3. Your Down Payment
The more you can put down, the less you’ll borrow and the better your monthly payments might look. Some loans require as little as 3% down, while others may benefit from a full 20% down to avoid private mortgage insurance (PMI).
4. Loan Type and Interest Rate
The kind of loan you qualify for (conventional, FHA, VA, etc.) and your interest rate will directly affect how much house you can afford. Even a small change in rates can make a big difference in your monthly budget.
5. Local Taxes and Insurance
Don’t forget to factor in property taxes and homeowner’s insurance, they’re often rolled into your monthly mortgage payment. These costs vary by state and city.
Pro Tip: Get Pre-Approved
Pre-approval helps you shop with confidence. It gives you a clearer picture of your price range and it tells sellers you’re serious. Ready to find out what you can afford?