Figuring out how much house you can afford can feel like playing The Price Is Right. Get it right, and you move into your dream home. Get it wrong, and you may have to say bye-bye. Complicating matters even further, the sticker price you see on a house never tells the whole story. There are a host of other costs that come with homeownership, and knowing how much you’ll really end up paying can feel like guesswork.
So, how much home can you afford? It’s tough to say without a mortgage approval, but it always helps to start with a home affordability calculator. You may be wondering how affordability calculators work if you’re ready to get some numbers down on paper before showing up for a pre-qualification meeting with a lender. Take a look at the top questions buyers have about making sense of the home affordability calculator.
What is a home affordability calculator?
A home affordability calculator is one of the simplest tools you’ll use in the homebuying process. Its purpose is to help give you an idea of how much home you can afford with a home loan.
To get started, you simply need to input some basic information, like your ZIP code, income, credit score range, down payment amount, and monthly minimum debt payments (you might even know some of it off the top of your head).
After you enter your numbers, you can even play around a bit with inputting different figures, such as the down payment amount, to see where they land you in terms of monthly payments.
What are the top 11 factors that determine affordability?
Lenders need to know that you can reasonably afford your monthly payments. Here’s what they look at:
1. Income: This is your gross annual income before taxes.
2. Debts: How much of your income is going toward monthly minimum debt payments? Examples include credit card and student loan debt and your car payment.
3. DTI ratio: Your debt-to-income ratio is a big deal for lenders.
You get your DTI by dividing your total monthly minimum debt payments by your gross monthly income (this is the figure before taxes and deductions are taken out). Many lenders want to see a DTI of 45% or below (some qualified buyers can go up to 50%), including your prospective mortgage payment.
4. Credit score: Your credit score is an evaluation of your creditworthiness, or how much risk you may pose as a borrower. This number, ranging from 300 to 850, tells a lender how well you manage your debts.
Your lender uses your score to help determine whether you qualify for a mortgage as well as the rate you’re offered.
5. Down payment: How much money you can put down toward the cost of the house. Your down payment also affects your interest rate and your monthly mortgage payments.
Putting down at least 20% can help you avoid having to pay mortgage insurance (MI), but some loan programs allow homebuyers to put down as little as 3% — or even none at all.
6. Mortgage interest rate: The mortgage interest rate you’re offered depends on your credit score, down payment amount, and other important details of your home purchase. And that rate can have a pretty big impact on your home affordability.
A higher rate means higher mortgage payments, so you may not be able to borrow as much money. Similarly, a lower rate will bring your monthly payments down, and increase your home budget.
7. Loan term: You may find some 10- or 15-year loans have lower interest rates than 30-year loans. Shorter-term loans also tend to come with higher monthly payments, but you’ll pay less interest over the life of the loan because you’re holding it for less time.
8. Homeowners insurance: It’s important to bake this into your expected monthly expenses because most lenders require homeowners insurance!
This can tack on between $1,000 and $2,000 in insurance costs per year for the average homeowner.
9. Mortgage insurance (MI): While a 20% down payment isn’t required for a home purchase, if you use a conventional loan and don’t put down 20% at closing you’ll likely be on the hook for private mortgage insurance (PMI). PMI protects the lender in case you stop making payments on your loan. FHA and USDA loans also come with their own form of mortgage insurance. You can use a home affordability calculator to see how your monthly numbers look both with and without mortgage insurance as you decide how much to put down.
10. Homeowners association (HOA) fees: Lenders take this number into account when determining your maximum monthly mortgage payment. Add this in if you’re eyeing neighborhoods or buildings that charge monthly maintenance or membership fees.
11. Property taxes: You’ll also want to factor in property taxes. You can check out some online resources to learn more about property taxes in your target area.
What’s the difference between pre-qualified and pre-approved?
Pre-qualification is a ballpark estimate a lender gives you when you share self-reported information, including your income, credit score, and down payment amount. Because they’re unverified, pre-qualifications are typically offered quickly, within a few minutes.
Many real estate agents prefer that you have at least a pre-qualification number before you begin your home search. The pre-approval, on the other hand, gives you a more concrete figure for what you will actually be able to borrow based on a more rigorous inquiry into your finances and records.
What’s the 28/36 rule?
The 28/36 rule is often touted by financial experts to help buyers set smart home budgets. The recommendation is that your mortgage payment should not account for more than 28% of your monthly pre-tax income. In addition, your total monthly debt payments should not account for more than 36% of your pre-tax income.
Keep in mind that the 28/36 rule is completely separate from lender DTI requirements. It’s simply a way to think about budgeting, and it has no bearing on your mortgage approval.
How do I get the best interest rate?
One way to fast-track getting a good interest rate is beefing up your credit score. Borrowers with credit scores of 740 or higher tend to get the best rates.
How much can I afford with a Federal Housing Authority (FHA) loan?
“The whole point of FHA is to make it easier for folks to qualify for homes,” says Richard Helali, mortgage sales leader at HomeLight. For that reason, FHA loans have more relaxed credit score requirements, and offer low down payment options.
A credit score of 580 or above lets you put down just 3.5% with an FHA loan. However, you’ll have to make a minimum down payment of at least 10% if your score is between 500 and 579. Another thing to keep in mind: there are loan limits for FHA; the cap is somewhere between $356,362 and $822,375, depending on your county.
How much can I afford with a VA loan?
If you qualify for a VA loan, you won’t need a down payment. While VA loans don’t have income or credit score requirements, most lenders will want to see a DTI of 41% or lower. The loan limits for VA loans fall between $548,250 and $822,375.
How much are closing costs?
The general rule is that closing costs total between 2% and 5% of the loan amount.
Helali points out that fees vary by lender and shares that some don’t charge lender fees at all (like HomeLight Home Loans!). As a result, buyers save money on closing costs, so he commonly sees buyers landing closer to 2% of the home’s loan amount.
Can you trust a home affordability calculator?
“I would say it is pretty much on point,” Helali says of the figures most future borrowers walk into his office with after using home affordability calculators.
It’s great news for first-time buyers feeling nervous about showing up for pre-qualifications and pre-approvals and who are not sure how much they’ll qualify for. Helali still recommends that buyers reach out to a lender to discuss specifics if they are eyeing a particular property so they can set up realistic expectations about whether they’re in a financial position to make a competitive offer.
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