How much house can I afford?
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How we calculate affordability
To calculate how much house you can afford, we take into account a few primary items, such as your household income, monthly debts (for example, car loan and student loan payments) and the amount of available savings for a down payment. That said, as a home buyer, it’s important to have a certain level of comfort in understanding your monthly mortgage payments. While your household income and monthly debts may be relatively stable, your overall savings and how much you wish to allocate toward your home can vary depending on how much you want to set aside for a rainy day or how much you want to set aside for a future expenditure.
A good affordability rule of thumb is to have three months of your housing payments, including your monthly expenses, in reserve. This will give you an additional buffer for covering your mortgage payment in case there is some unexpected event.
Total debt-to-income (DTI) ratio
An important metric that your bank uses to calculate the amount of mortgage you can borrow is the DTI ratio, or simply put, the ratio of your total monthly debts (for example, your mortgage payments including property and tax payments) to your monthly pre-tax income. Depending on your profile and lending resource, you may be qualified at a higher ratio closer to 43%. We recommend that your total monthly spend for housing and debts should not exceed 36% of your monthly income in order to provide you with a safe cushion.
FHA vs. conventional loan
In considering your available savings for a down payment there are specific loan types to consider. We’ve made the assumption that if you have at least a 20% down payment, you would be better fit for a conventional loan and anything less (down to a minimum of 3.5%) would be considered for a FHA loan. For more on the types of mortgage loans, see Selecting the Right Mortgage.
The 28%/36% rule - what it is and why it matters
To calculate ‘how much house can I afford,’ a good rule of thumb is using the 28%/36% rule, which states that you shouldn’t spend more than 28% of your gross monthly income on home-related costs and 36% on total debts, including your mortgage, credit cards and other loans like auto and student loans.
Example: If you earn $5,500 a month and have $500 in existing debt payments, your monthly mortgage payment for your house shouldn’t exceed $1,480.
The 28%/36% rule is a broadly accepted starting point for determining home affordability, but you’ll still want to take your entire financial situation into account when considering how much house you can afford.
What factors help determine 'how much house can I afford?'
Key factors in calculating affordability are 1) your monthly income; 2) available funds to cover your down payment and closing costs; 3) your monthly expenses; 4) your credit profile.
- Income – Money that you receive on a regular basis, such as your salary or income from investments. Your income helps establish a baseline for what you can afford to pay every month.
- Funds available – This is the amount of cash you have available to put down and to cover closing costs. You can use your savings, investments or other sources.
- Debt and expenses – It’s important to take into consideration other monthly obligations you may have, such as credit cards, car payments, student loans, groceries, utilities, insurance, etc.
- Credit profile – Your credit score and the amount of debt you owe influence a lender’s view of you as a borrower. Those factors will help determine how much money you can borrow and what interest rate you’ll be charged. Check your credit score.
For more information about home affordability, read about the total costs to consider when buying a home.
If I can afford the home, should I buy it?
We’ll provide you with an appropriate price range based on your situation. Most importantly, we’ll take into account all your monthly obligations to determine if a home is comfortably within reach.PRO TIP:
It’s also important to plan for the future. Consider creating a savings plan for upcoming life events, such as having a child.
What if I am pre-qualified by a bank for a higher amount than my affordability results tell me?
When banks evaluate your affordability, they only take into account your outstanding debts. They do not take into consideration if you want to set aside $250 every month for your retirement or if you’re expecting a baby and want to set aside additional funds. NerdWallet’s Affordability Calculator helps you easily understand how taking on a mortgage debt will affect your expenses and savings.