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How Much House Can I Afford? A Comprehensive Guide for Homebuyers

Last Updated on:
November 22, 2023
Edited By:   Bryan Henry
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Buying a house is a significant milestone in a person’s life, but understanding how much you can afford is crucial in making a smart financial decision. Determining the right budget for your new home involves various factors, such as your income, expenses, and future financial goals. Knowing what you can comfortably afford ensures that you do not put unnecessary stress on your finances.

When calculating how much house you can afford, consider your monthly income, existing debt, savings for a down payment, and any additional costs of homeownership, such as property taxes, insurance premiums, and maintenance expenses. A commonly used guideline is the 28/36 rule, which suggests that your monthly mortgage payment should not exceed 28% of your gross income, and your total debt payments should not surpass 36% of your income. By assessing these factors and using online tools like Zillow’s Affordability Calculator or NerdWallet’s Affordability Calculator, you can establish a realistic range for your home purchase.

As you begin your search for a new house, it’s essential to keep your budget in mind and prioritize your must-have features. It’s easy to get distracted by appealing upgrades and luxury items, but sticking to your budget will ensure long-term financial stability. Being confident, knowledgeable, and clear about your financial capabilities will ultimately help you make the right choice when it comes to purchasing a home within your means.

Requirements to Meet for Getting a Mortgage

When you’re looking to purchase a home, it’s crucial to understand the requirements that must be met to secure a mortgage. Factors such as your credit score, income, savings, down payment, and debt-to-income ratio all play a role in determining how much house you can afford. In this section, we will discuss these key requirements and provide you with the essential information to navigate the mortgage application process.

Credit Score

Your credit score is one of the primary factors lenders consider when determining whether you qualify for a mortgage. A higher credit score indicates a lower risk of default. Generally, a score above 620 is considered acceptable for conventional loans, while FHA loans typically require a minimum score of 580. However, for the best interest rates and terms, you should aim for a credit score above 740. Make sure to check your credit report and correct any errors before applying for a mortgage.


Lenders will evaluate your income to determine your ability to repay the mortgage. This includes not only your primary salary but also additional income sources such as rental income, investments, or freelance work. When determining how much house you can afford, consider a mortgage payment that doesn’t exceed 28% of your gross monthly income.

Savings and Down Payment

Having sufficient savings is crucial when applying for a mortgage, as you’ll need to make a down payment on your new home. Conventional loans usually require a down payment between 10% and 20% of the home’s value, while FHA loans may require as little as 3.5%. VA loans, available for eligible military personnel, could offer the most favorable terms with no down payment requirement. The larger your down payment, the more favorable mortgage terms and interest rates you may be eligible for.

Debt-to-Income Ratio

Your debt-to-income (DTI) ratio is another vital factor that lenders consider when determining your mortgage eligibility. To calculate your DTI ratio, divide your total monthly debt payments (including the proposed mortgage payment, credit card bills, student loans, etc.) by your gross monthly income. Lenders typically prefer a DTI ratio below 43%, although lower ratios could improve your chances of getting favorable mortgage terms.

Steady Income

A steady income history demonstrates your financial stability, which is essential when applying for a mortgage. Lenders often look for a consistent employment history of at least two years, which can include time spent in the same industry or a similar line of work. Factors such as job changes, gaps in employment, or self-employment may require additional documentation to verify your income stability.

By understanding these mortgage requirements, you’ll be better equipped to navigate the home-buying process and find a mortgage that suits your financial situation.

Different Types of Mortgages

Conventional Loans

Conventional loans are the most common type of mortgage. They are offered by private lenders, such as banks and credit unions, and usually require a down payment of at least 3-5%. Conventional loans have more stringent credit requirements compared to other types of mortgages. If you have a good credit score and a stable income, a conventional loan may be the best option for you.

There are two types of conventional loans:

  1. Fixed-rate loans: The interest rate remains the same throughout the entire life of the loan. This means your monthly payments are predictable and won’t change over time.
  2. Adjustable-rate loans: The interest rate can change periodically, typically based on a market index. This means your monthly payments may fluctuate. They usually start lower than fixed-rate loans but can increase over time.

FHA Loans

FHA loans are insured by the Federal Housing Administration, making them attractive to borrowers with lower credit scores or limited down payment funds. They have lower credit score requirements compared to conventional loans, and down payments can be as low as 3.5%. However, you’ll need to pay mortgage insurance on an FHA loan, which increases your overall borrowing costs.

VA Loans

VA loans are a special type of mortgage for eligible veterans, active-duty service members, and certain military spouses. These loans are guaranteed by the Department of Veterans Affairs and offer numerous benefits, such as zero down payment requirements and competitive interest rates. VA loans do not require monthly mortgage insurance, but there’s typically a funding fee to help maintain the program.

USDA Loans

USDA loans are designed for low- and moderate-income homebuyers in rural areas. They are backed by the United States Department of Agriculture and offer several attractive features, like 100% financing (no down payment required) and low mortgage insurance costs. To qualify for a USDA loan, the property must be located within an eligible rural area, and your household income cannot exceed certain limits set by the USDA.

Calculating How Much House You Can Afford

When determining how much house you can afford, it’s crucial to consider your monthly income, expenses, and your future financial goals. There are two main methods you can use to figure out the ideal price range for purchasing a home: the 28/36 rule and using a mortgage affordability calculator.

The 28/36 Rule

The 28/36 rule is a widely-used benchmark for determining your affordability. This rule states that your housing expenses (mortgage payments, property taxes, insurance, etc.) should not exceed 28% of your gross monthly income, while your total debt payments (which includes housing expenses, credit card payments, car loans, student loans, etc.) should not surpass 36% of your gross monthly income.

Here’s an example:

  • Monthly Income: $5,000
  • Maximum Housing Expenses (28%): $1,400
  • Maximum Total Debt Payments (36%): $1,800

To apply the 28/36 rule, first calculate 28% of your gross monthly income to understand the maximum you can spend on housing expenses. Then, calculate 36% of your gross monthly income to understand your maximum total debt payments, including your housing expenses.

Using a Mortgage Affordability Calculator

Another effective method to determine how much house you can afford is by using a mortgage affordability calculator. These online tools take into account your monthly income, down payment, loan term, interest rate, and other factors to provide you with an estimate of the mortgage amount and monthly payment you can afford.

Here’s a brief overview of the information you’ll need to use a mortgage affordability calculator:

  • Monthly Income (before taxes)
  • Down Payment (at least 3% to 20%)
  • Loan Term (typically 15 or 30 years)
  • Interest Rate (depends on the current market and your credit score)
  • Property Taxes (usually a percentage of the home’s value)
  • Home Insurance (varies depending on the coverage and location)
  • Debts and Expenses (credit card payments, car loans, student loans, etc.)

By inputting this information, the calculator will provide you with an estimate of the mortgage loan amount and monthly payment you can afford, helping you make informed decisions when searching for a home that fits your budget and financial goals.

Remember that these guidelines and tools are here to assist you, but you need to evaluate your personal situation and future goals to make the best decision for your specific needs and lifestyle.

Cost Factors To Consider

When determining how much house you can afford, there are several cost factors to consider. Here are some essential elements that will play a role in your home affordability:

Interest Rates

The interest rate on your mortgage is a crucial factor to consider. A higher interest rate means paying more interest over the life of the loan, ultimately increasing your monthly mortgage payment and reducing the amount you can afford.

Insurance Requirements

Homeowners insurance is typically required by lenders when purchasing a house. The cost of insurance varies based on the property value, location, and coverages. Make sure to factor in insurance costs when calculating your monthly housing budget.

Closing Costs

Purchasing a home comes with various closing costs, such as appraisal fees, loan origination fees, and title insurance. Closing costs typically range between 2% and 5% of the price of the home, which will add to the overall expense of your purchase.

Property Taxes and HOA Fees

Don’t overlook property taxes and any Homeowners Association (HOA) fees, which might be applicable in certain neighborhoods. Property taxes will vary based on the tax rate in your area and the assessed value of your property. HOA fees, on the other hand, cover community amenities and services like garbage collection or lawn maintenance.

Private Mortgage Insurance

If you’re unable to make a 20% down payment on your home purchase, you may be required to pay Private Mortgage Insurance (PMI). PMI is an additional cost that lenders charge to protect themselves in case the borrower defaults on their loan. PMI can range between 0.3% and 1.5% of the original loan amount per year.

Household Expenses and Maintenance Costs

Lastly, consider the ongoing expenses related to homeownership, such as utilities, home maintenance, and repairs. These costs can – and usually do – add up over time. Factor in the cost of general upkeep and any foreseeable renovations in your home affordability calculations.

By keeping these cost factors in mind when calculating how much house you can afford, you’ll set yourself up for a more comfortable and financially stable homeownership experience.

Implications of Borrowing More Than You Can Afford

When considering a mortgage, it’s essential to understand how much house you can realistically afford. Borrowing more than you can handle can lead to long-term consequences that affect your financial stability.

Struggling with monthly payments: If your mortgage is too large, you may face difficulty making your monthly payments. This can strain your budget and divert funds away from other essential expenses, such as utilities and groceries. Using an online calculator can help you estimate potential monthly payments based on your income and debt-to-income ratio.

Risk of foreclosure: Failing to make mortgage payments on time puts you at greater risk for foreclosure. Losing your home can be a devastating experience, and it’s crucial to assess your financial limits before taking on a large loan.

Higher interest costs: A larger loan means higher overall interest costs, which can result in paying significantly more for your house over the loan term. Choosing a mortgage with a shorter loan term can help minimize interest charges, but the monthly payments will be higher.

  • Unexpected expenses: Owning a home comes with many unpredicted costs, including maintenance, repairs, and potential loss of income. When you borrow more than you can afford, it often leaves little room for adjusting to these additional expenses. Making sure you have an emergency fund can help you manage these unexpected costs without jeopardizing your mortgage.

Impacts on other financial goals: Overextending yourself with a large mortgage can limit your ability to save for other financial goals, such as retirement, education, or vacations. By borrowing within your means, you ensure that you can allocate money toward these objectives while still paying off your home.

Prolonged debt: If you borrow more than you can afford, it may take longer to pay off the mortgage, keeping you in debt for an extended period. Becoming debt-free is an essential step toward achieving financial freedom, so it’s vital to avoid borrowing more than necessary when purchasing a home.

Before making any decisions, carefully analyze your financial situation and future plans. By doing so, you’ll be better prepared to choose a mortgage that is comfortable, affordable, and aligned with your long-term goals.


When considering buying a house, it’s essential to determine the maximum home price that fits comfortably within your budget. Taking into account factors such as your income, debt, and necessary expenses, you can better understand the range of affordability for your future home.

To make this process easier, use tools like the Zillow Affordability Calculator, which estimates the home price you can afford based on your financial situation. Remember, your monthly mortgage payment should not significantly strain your budget or interfere with your ability to cover daily living expenses.

As homebuyers, keep in mind that interest rates play a crucial role in determining your monthly mortgage payment. For example, purchasing a $500,000 house with a 10% down payment and a 5% interest rate would result in a monthly mortgage payment of around $2,415. It’s important to shop around for the best interest rates and loan terms to find a mortgage that works best for you.

In the end, the key to successfully determining your affordability is to understand your unique financial situation. This includes considering your income, existing debt, and essential expenses, as well as any future financial goals. By carefully evaluating these aspects, you can confidently choose a home that meets your needs while staying within your means.

Written By:
Debbie Wheeland