Home Affordability Calculator

Use this home affordability calculator to estimate how much house you can afford with your budget.
Home Affordability Calculator
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How much house can you afford?

The dream of homeownership is becoming increasingly difficult for many Americans.

With rising home prices and interest rates, a growing affordability crisis has priced out many potential buyers, especially young people starting out.With inventory low and competition high in many markets, it can be challenging to find an affordable home that checks all your boxes.

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However, homeownership is still possible with careful planning, budgeting, and prioritizing. This guide will walk you through the key steps to determine how much home you can realistically afford based on your financial situation. Utilize our home affordability calculator to gain further insights into your individual financial circumstances.

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Photo by Tierra Mallorca on Unsplash

Determine Your Budget

When determining how much home you can afford, one of the most important factors is your debt-to-income ratio (DTI).

This measures how much of your gross monthly income goes toward paying debts, including your mortgage.

Lenders typically look for a DTI of 36% or less for conventional loans. This means no more than 36% of your gross monthly income should go toward total debt payments.

Of that, 28% or less should go specifically toward your mortgage payment and home expenses like property taxes and insurance.

Keeping your DTI at 36% or below shows lenders you have enough income left over after debts to comfortably make your mortgage payment. Going above 43% makes it very hard to qualify.

Knowing your DTI helps determine a mortgage amount you can realistically afford. Total up your monthly debts like car loans and credit cards. Add in estimated mortgage costs. Divide by your gross monthly income. This gives your DTI percentage. Aim for 36% or lower.

Get Pre-approved for a Mortgage

Getting pre-approved for a mortgage is a crucial first step when determining how much home you can afford. Pre-approval involves having a lender review your finances, including income, assets, debts, and credit score, to determine the maximum mortgage amount you qualify for.

The pre-approval letter states the maximum loan amount, interest rate, and loan terms you are eligible for. This gives you a realistic price range to shop in and shows sellers you are a serious buyer. It also locks in an interest rate for a set period.

You will still need to provide documentation and go through underwriting later in the mortgage process, but preapproval provides an initial mortgage approval.

Knowing your budget and getting prequalified or pre-approved is one of the most important first steps for homebuyers. This helps you set price expectations, demonstrates financial readiness to sellers, and determines if you need to save more for a down payment before purchasing.

Consider Down Payment Options

The typical down payment on a house for first-time homebuyers is around 6% of the purchase price, according to.

However, the minimum down payment depends on the type of mortgage:
  • Conventional loans typically require a 20% down payment. This avoids paying private mortgage insurance (PMI).
  • FHA loans only require a 3.5% down payment. However, you’ll have to pay mortgage insurance premiums.
  • VA loans allow qualified veterans and service members to purchase a home with 0% down. VA funding fees apply instead of PMI.
  • USDA loans offer 100% financing for low- and moderate-income buyers in rural areas.

While putting down 20% is ideal to avoid PMI, first-time buyers often don’t have enough saved. A smaller down payment can be a good option to get into a home sooner. Just be aware of the added costs of mortgage insurance or funding fees.

Other costs of being a homeowner

Closing costs are fees paid when you purchase a home, typically between 2-6% of the home’s price. These cover loan fees, appraisal fees, title insurance, and more. On a $300,000 home, expect $6,000-$18,000 in closing costs.

You’ll also budget for property taxes, typically 1-3% of the home’s value annually. And if the home is part of a homeowners association (HOA), account for HOA fees which average $200-$400 per month.

Ongoing maintenance is also a consideration. Budget 1-4% of the home’s value annually for repairs like roofing, painting, HVAC maintenance, etc.

Choose the Right Mortgage

The most popular mortgage types for first-time home buyers are fixed-rate mortgages, adjustable-rate mortgages (ARMs), and 15-year or 30-year terms.

Around 90% of home buyers choose a 30-year fixed-rate mortgage. This provides predictable monthly payments over the full loan term.

15-year fixed-rate mortgages have higher monthly payments but build equity faster with lower interest rates. The shorter term can save substantially on total interest paid. ARMs start with lower payments but the rate and payment adjust periodically based on market rates. This involves some risk if rates rise significantly.

When choosing a mortgage, it’s important to compare interest rates, monthly payments, and total costs over the loan term. Consider how long you plan to stay in the home. Opting for a lower monthly payment now may cost more long-term if rates rise later with an ARM. Work with a lender to evaluate the best mortgage structure for your financial situation and goals.

Prioritize Must-Haves

When buying a home, it’s important to prioritize your must-haves, needs, and wants. Your must-haves are the features you absolutely cannot compromise on.

These may include location, number of bedrooms and bathrooms, yard space, garage, and school district. You’ll want to focus your home search on houses that meet all of your must-have criteria.

To determine your must-haves, make a list of your top housing priorities within your budget. Also factor in conveniences like proximity to work and family or amenities like outdoor space.

It’s important to be realistic about must-haves. For example, a large gourmet kitchen may be a want rather than a need. Focusing too much on wants can limit your options and prevent you from finding a home that fits your budget and must-haves. Prioritizing needs over wants can help you make smart compromises.

Consider Resale Value

When buying a new home, it’s important to consider long-term resale value. How long you plan to stay in the home will impact this decision. You should live in a home for at least 5 years before selling in order to maximize your return on investment.

The longer you hold onto the property, generally the larger profit you’ll make when selling thanks to factors like home appreciation over time.

However, other factors beyond just timing play into resale value as well. Choosing a home in a desirable location and school district, opting for timeless design features/finishes, and keeping up on maintenance can all help boost future resale potential.

It’s wise to balance your own wants/needs with appeal for future buyers. For instance, very customized spaces like bold paint colors or highly specific add-ons may limit the home’s future marketability.

Overall, buying a home is a big investment. Making smart choices with resale in mind – like staying 5+ years before selling and selecting universally appealing features – can help protect that investment long-term.

Key Takeaways

Determining how much home you can afford is an important financial decision that requires careful consideration. By taking the time to use our home affordability calculator, you’ll be in a better position to find the right home for your needs and budget.

When determining affordability, be sure to be realistic about your current and future financial situation. While buying a home is exciting, you don’t want to overextend yourself financially. Consider working with a financial advisor or real estate agent to help assess affordability and find loan options that fit your budget.

The home buying process can feel overwhelming, but taking it step-by-step will help you make a well-informed decision. Start by honestly assessing your budget and how much you can devote to a mortgage payment and other housing expenses.

Get pre-approved for a loan, so you know your price range when house hunting. And don’t forget to factor in taxes, insurance, maintenance and other costs beyond just the mortgage payment.

Buying a home is a major investment, so take your time and make sure you find the right home that you can comfortably afford. With the right preparation and guidance, you’ll be well on your way to achieving your homeownership goals.

Disclosure: This post may contain affiliate links, meaning we receive a commission for purchases made through these links, at no cost to you.

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