Calculate How Much House You Can Afford
Maximum Home Price
Understanding Your Home Affordability
Purchasing a home is likely the largest financial decision you will make in your lifetime. Before you start touring open houses or browsing listings, it is critical to answer the question: "How much house can I actually afford?" Our Home Affordability Calculator helps you estimate a realistic budget based on your income, debts, and current mortgage interest rates.
How Is Home Affordability Calculated?
Lenders use specific metrics to determine how much money they are willing to lend you. The most important of these is the Debt-to-Income (DTI) Ratio. This ratio compares your gross monthly income to your total monthly debt obligations.
The 28/36 Rule
Traditionally, financial advisors and lenders follow the 28/36 rule of thumb:
- Front-End Ratio (28%): Your housing costs (mortgage principal, interest, taxes, and insurance) should not exceed 28% of your gross monthly income.
- Back-End Ratio (36%): Your total monthly debt payments (housing costs + credit cards, student loans, car payments, etc.) should not exceed 36% of your gross monthly income.
While some loan programs (like FHA loans) allow for higher ratios (up to 43% or even 50%), staying within the 28/36 limits ensures you aren't "house poor" and have funds remaining for other life expenses.
Key Factors Affecting Your Buying Power
Several variables impact the final price of the home you can afford:
1. Interest Rates
Interest rates have a massive impact on affordability. As rates rise, the cost of borrowing increases, significantly reducing your purchasing power. A 1% increase in interest rate can reduce your buying power by roughly 10%.
2. Down Payment
A larger down payment increases your affordability in two ways: it reduces the loan amount you need to finance, and it may help you avoid Private Mortgage Insurance (PMI), which is an extra monthly cost.
3. Monthly Debts
Existing debts directly reduce the amount of income available for a mortgage. Paying off a car loan or credit card balance before applying for a mortgage can significantly boost your qualification amount.
Tips for Increasing Your Affordability
- Improve Your Credit Score: A higher credit score often qualifies you for lower interest rates.
- Reduce Existing Debt: Lowering your monthly obligations improves your DTI ratio.
- Save for a Larger Down Payment: This lowers your monthly payment and increases equity immediately.
- Consider Different Loan Terms: While a 30-year term is standard, different terms affect monthly payments and total interest paid.
Frequently Asked Questions
What does "Gross Income" mean?
Gross income is your total income before taxes and deductions. This includes your salary, bonuses, overtime, and any other consistent income sources.
Do I need a 20% down payment?
No. While 20% helps avoid PMI, many conventional loans allow for as little as 3% down, and FHA loans allow for 3.5% down. However, a lower down payment means a higher monthly mortgage payment.
What are closing costs?
Closing costs are fees paid at the closing of a real estate transaction. They typically range from 2% to 5% of the purchase price. It is important to have liquid cash saved for these costs in addition to your down payment.