How Much House Can You Really Afford?

It's more than tempting to dive right in and start favoriting houses on real estate listing sites, but it's not worth falling in love — or even lust — if the property's way beyond your budget. But how do you determine your price range? You could reach out to mortgage lenders and see what they'd be willing to let you borrow, but you're likely better off working backward from the monthly mortgage payment. Here's why.

» MORE: Try NerdWallet's home affordability calculator

Why start with the monthly payment?

Loan officers often offer to start by looking at the maximum mortgage amount you could qualify for, based primarily on your credit score and debt-to-income ratio. While it can feel pretty cool to see a big number, maxing out what a lender will offer could leave you house poor. That would mean too much of your income would go toward housing, leaving you scraping to pay your other bills, let alone save for retirement, travel or have fun.

Before you start talking to lenders, you should have a strong sense of your current financial situation. That includes money coming in, money going out and money goals. For example, if you want to start a family or plan to increase your contributions to your 401(k), include that extra spending even if it's not part of your current budget. If you're considering a career change or going back to school down the line, think about how that would affect your household income. Use those numbers to figure out what mortgage payment amount would be comfortable for you.

» MORE: What it really costs to buy a house

What goes into a monthly mortgage payment

Say you can afford $1,600 a month for your mortgage payment. Great! But before you start trying to figure out how much house that could add up to, realize there's more to a mortgage payment than just paying back your home loan. Here's what could be included in that monthly bill:

• Principal. This is the part of your payment that goes toward the amount you actually borrowed.

• Interest. Your mortgage interest rate determines how much you're charged for borrowing the money. When your home loan is relatively new, more of the payment will go toward interest. As you near the end of the loan, the balance tips toward principal. This shift is called amortization.

• Mortgage insurance. If you make a down payment of less than 20% on a conventional loan, you'll have to pay private mortgage insurance until you have sufficient home equity to get rid of it. With a home loan backed by the Federal Housing Administration, mortgage insurance can last for the life of the loan.

• Property taxes. Though property taxes are paid twice a year in many places, most homeowners make them a little less painful by chipping away each month rather than paying them all at once. The tax payment is bundled in your monthly mortgage payment, held in escrow by your mortgage servicer and disbursed as needed.

• Homeowners insurance. Your lender will require you to have a homeowners insurance policy. Whether you pay for it once a year or in installments to your insurance carrier, or have it split over your monthly mortgage payments and held in escrow by your mortgage servicer, it’s part of your monthly homeowning budget.

• HOA fees. If your home is part of a homeowner association, you'll usually pay monthly HOA fees. These are often included in your mortgage payment.

Bear in mind that these aren't all the housing-related expenses you may have as a homeowner. You might want to have a repair fund, for example, that you set aside money for each month. Costs to maintain your property — like if you pay for lawn care or snow removal — can figure in here, too.

» MORE: Planning your budget as a new homeowner

Use a home affordability calculator

To get a quick answer to how much house you can afford, you can use a home affordability calculator. NerdWallet’s calculator uses the 28/36 rule as a baseline. That means an "affordable" monthly mortgage payment would be no more than 28% of your gross income, and no more than 36% of your gross income goes toward debts (including your mortgage).

Here's how we get there:

1. Start by entering your desired ZIP code. Local property values — and property taxes — are key determinants of affordability.

2. Next, enter your pretax (gross) income.

3. Put in the amount you're planning to save for a down payment.

4. Estimate your monthly budget's nonnegotiables, like car payments and credit card debt. Don't include musts (like groceries) or nice-to-haves (travel) — the calculator leaves a cushion for that.

5. Last, estimate your credit score. Your credit score affects what interest rate lenders will offer you. When more of your mortgage payment goes toward servicing interest, there's less left over to pay for the actual home.

Once you've got your results, you can adjust the variables to see how your costs would change if, for example, you made a larger down payment or you substantially changed your credit score. You can also add or alter parts of the mortgage payment, like homeowner association fees or private mortgage insurance.

» MORE: Check your credit score

Ways to make your homebuying dollar go further

Again, for most buyers it doesn't make sense to stretch for the absolute maximum they could borrow. But there are a few strategies that you can use to afford a bit more house for your dollar.

Take a fresh look at your overall debt strategy. Is there anything you could do differently? Reducing your monthly debt lowers your debt-to-income ratio, a key figure that lenders use to determine how much you can borrow. Work on paying down existing debt, and avoid opening new accounts or taking on more debt.

Choose a 30-year loan term. Even if you don't think you'll live in the home for three decades, spreading out the payments over a longer timeline will give you lower payments. If you want to start paying off your mortgage more quickly, you can make additional payments or pad your principal each month.

Consider an adjustable-rate mortgage. ARMs generally give you a few years with a lower introductory interest rate before the rate adjusts. For example, if you're looking at a 5-year or 5/6 ARM, that's going to give you five years at that introductory rate. The interest rate will then adjust, up or down, every six months. Depending on what's happening with mortgage rates in five years (or whenever your introductory term is up), you might refinance to a fixed-rate loan or refinance to a new ARM in order to keep a lower interest rate.

Shop around. Look at different mortgage lenders' products and sample interest rates, and apply for mortgage preapproval from at least three lenders. Compare the interest rates you're offered to see which is the best deal for you. The less money you have to put toward interest, the more house you can afford.