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Home affordability glossary

Annual Income

This is your annual income before taxes, including salary, commission, social security, interest, and more. Your annual income helps determine how much debt you can take on and what you should allocate for a down payment.

Monthly Debts

Your monthly debts are car payments, student loans, and other recurring personal expenses you make monthly payments on. This number doesn’t include credit card balances you pay off in full each month or the new mortgage you’re getting.

Down Payment

A down payment is what you pay upfront and out-of-pocket towards the purchase of your new home with a mortgage. Some lenders offer loans that require as little as 3% down, but as a rule, the higher your down payment, the lower your rate and monthly payment will be. A down payment of 20% or more will start you off with a healthy amount of equity and allow you to avoid additional lender-required expenses, such as mortgage insurance.

Loan Term

The loan term refers to the period of time you’ll be paying off your mortgage if you meet the minimum payment every month. For example, a 30-year fixed mortgage lasts, you guessed it, 30-years. Overall, a loan term affects your monthly payments and the total amount of interest you’ll pay over the life of the loan.

Property Tax

Property taxes vary widely depending on your location. That’s why we factor in where you’re looking to buy a home to help you determine affordability.

Homeowners Insurance

Your lender will require you to purchase homeowners insurance that covers your mortgage in the event that something happens to your home. Depending on where you live, your lender might have specific requirements on how much and what kind of insurance you need to buy.

HOA Fees

If you buy a home in a Homeowners Association, you’re required to pay monthly association fees that cover the maintenance of your community. These fees can run from $100 to $1,000 each month, so make sure you clarify whether you’ll need to pay them before closing on your new home.

How to (Safely) Budget for a House

It’s important to understand the costs associated with buying a home before you start looking at homes for sale. Many homeowners find themselves surprised by these costs once they’ve purchased a new home. That’s why we created the Home Affordability Calculator; to arm you with the information you’ll need to make the best decision for you and your financial situation.

How we calculate home affordability

The first step is figuring out what you can actually afford. You want to look for the perfect backyard and kitchen, but you should also understand what your monthly mortgage payments, property taxes, and home expenses will look like.

Our calculator takes into account your income, debts (ex: car loans, student loans), and the savings you have for the down payment.

Still, even if your monthly payments are consistent, you need to consider your overall savings and how much you can set aside for emergencies. Your down payment and monthly expenses shouldn't empty your entire bank account. Make sure you have a healthy reserve in liquid assets for life events you can't plan.

Home affordability calculator example

What’s a DTI and the 28/36% rule of thumb

Your debt-to-income ratio (DTI) helps lenders determine whether you’re able to afford a house. They look at your monthly debts (including your mortgage and rent, car, credit card payments, student loans, etc) and divide that number by your monthly gross income.

A healthy DTI can be up to 43%, but the best DTI for you depends on your specific financial circumstances.

Many financial advisors would suggest following the 28/36 principle. This means that your mortgage payments shouldn’t exceed 28% of your pre-tax income, and your total debt shouldn’t be more than 36% of your pre-tax income. By following the 28/36 rule, you can avoid finding yourself underwater with too much debt.

So, let’s say you make around $6,000 per month. Your monthly mortgage payment shouldn’t be over $1,680 and your monthly debt including monthly mortgage shouldn’t exceed $2,160.

Monthly Expenses
Pre-Tax Income
Debt to Income

Pre-approved vs. Pre-qualified

Getting pre-approved and pre-qualified are two very different things. Determining which is right for you depends on your situation.

To get pre-qualified, you answer a couple questions by estimating your income, expenses, and a range of your credit score. This step gives you an initial gauge of how much the lender is willing to loan you and how much house you can afford, without affecting your credit score. It usually only takes a few minutes to complete and you don’t need to provide any documentation. Overall, a pre-qualification gives you an estimate on what you can afford.

The pre-approval process, on the other hand, tends to be more involved. You complete a mortgage application and provide at least some financial documentation for your lender to verify, and they will run a formal credit check. A pre-approval is typically stronger than a pre-qualification because the lender has verified some or all of your important financial information. That way, they have a much clearer picture of the amount they can lend you. You’re also in a better bidding position since the seller knows that your lender is willing to make a loan. Read about the differences between pre-qualifications and preapprovals for more tips!

Interest rates

The interest rate you settle on can make a big difference in how much you’ll pay for your new home. Read more about what factors affect your interest rate and find out what rates you may qualify for

Private mortgage insurance

If you choose a standard conventional loan and you put down less than 20% on your new home, you will likely be required to get Private Mortgage Insurance (PMI). PMI costs vary, but they typically range from 0.5 to 1% of the loan amount annually. That’s in addition to your mortgage payment, property taxes and homeowner’s insurance. Find out more about PMI.

Closing costs and other fees

Closing costs and fees can account for 2 to 5% of the final purchase price of your home. Depending on the mortgage company you choose, you may also have to pay lender fees. Keep these costs in mind as you calculate how much home you can afford.

Pro Tip

Eave by HomeLight doesn’t charge you lender fees. You also won’t encounter any hidden fees that magically appear at the closing table.