While mortgage lenders place limits on how much you can borrow for a home based on your income and other debts, it’s also crucial that you think about your budget and how much you can actually afford to pay every month. So if you’re wondering “How much house can I afford?”, here’s what you need to know.
How to calculate how much house you can afford
1. Calculate your income vs. expenses
Write down how much you earn every month. Depending on your situation, your only source of income might come from a job, or you might have multiple sources, such as self-employment income, alimony, child support, Social Security income, or retirement income. While lenders look at your gross income to help determine how much you can afford, using your take-home pay will give you a more accurate picture of what you can pay every month.
Next, look at your expenses over the last few months and calculate how much you have leftover in your budget. Then, add that number to what you’re currently paying for housing, and that’s the maximum amount you can afford to pay.
2. Estimate the cost of housing
Take a look at what homes cost in your area and, using current market rates, calculate how much you’d pay monthly on a mortgage. Make sure you consider your down payment and closing costs to calculate the upfront expenses and monthly payment.
Remember that you’ll also have to pay property taxes and homeowners insurance premiums, which typically get added to your monthly mortgage payment. You can research property tax rates and average insurance premiums in your area to determine how much those might cost you.
If your down payment is less than 20 percent on a conventional loan or you have an FHA or USDA loan, make sure you incorporate mortgage insurance or guarantee fees into your estimation, as well.
3. Check your credit score
Your credit score has a big impact on your mortgage interest rate, so it can influence how much house you can afford. If your credit score is less than stellar, it might be better to take some time to work on improving your credit before you apply for a mortgage loan. To qualify for a conventional loan, you typically need a credit score of at least 620, but having a score in the mid-700s or higher is best if you want to qualify for the best rates available.
4. Figure out your DTI ratio
Your debt-to-income (DTI) ratio is a key factor lenders use to determine how much money you can borrow. If it’s too …….