Mortgage Calculations: How Much House Can I Afford?

by Hello Blue
January 30, 2020
Reading Time: 3 minutes

Buying a home is an exciting experience. You are finally ready to embrace homeownership, and you are excited to see what life has to offer next. 

It is easy to get busy talking about the features of your dream home. However, you need to consider your budget. You need to know how much house can you afford. 

A dream house becomes a burden if you can’t afford mortgage payments. 

It’s easier than ever to figure out how much house you can afford. You need to answer a few questions. 

What Mortgage Can I Afford Based on Monthly Payments?

What is your take-home monthly income? If you are married, add the salary of your spouse, so you know your household income. Let’s say; your household income is $6,000. 

The rule of thumb is that your mortgage payment should not be more than 25% of your monthly salary. That means your monthly mortgage installment must be under $1,500. When calculating monthly installments, consider the associated costs such as:

  • Property taxes
  • Homeowner’s insurance
  • Homeowners Association (HOA) fees
  • Private mortgage insurance

Taxes and insurance can increase your payment by a few hundred dollars. You need to factor in these costs to keep mortgage affordable. You can use our monthly mortgage payment calculator to calculate your monthly installments on the go. 

What is Your Down Payment? 

It’s possible to get approved for an FHA loan with a 3.5% down payment, but it is not the recommended option. Save at least 10% for the down payment. A better choice is to save up 20% so you can avoid private mortgage insurance. 

Let’s say; you buy a $200k house with a 20% down payment. You are borrowing $160k with a 4% fixed interest rate for the next 15 years. Your monthly installment will then be $1,453. However, if you make a 30% down payment, you can afford a $225k house without having to change monthly payments. It can be challenging to save money for a down payment. Keep in mind that your down payment is a direct investment in your house. 

How Much Are the Closing Costs? 

It is customary for the seller to pay agent commissions. However, the buyer is still responsible for other closing costs. It is estimated that closing costs can make up 4% of the overall cost. Closing costs include:

  • Appraisal fees
  • Home inspections
  • Credit reports
  • Attorney’s payment
  • Homeowner’s insurance

Your mortgage company will give you a written overview of these costs, and you’ll know the exact figures. However, it’s best to be prepared earlier. For a $200k house, you can estimate the closing costs to be $8,000. 

What is Your Debt-to-Income Ratio?

Lenders will review your DTI. What are your current debt obligations? Do you have student loans, vehicle loans or credit card debt? 

If so, how much do you have to pay each month for these debts? Divide your income by the monthly debt payments, and you’ll get your DTI. Ideally, your current DTI should be less than 36%, and mortgage installments should not be more than 25% of your salary.  

After answering these questions, you’ll have an exact idea of the amount you can afford. What we haven’t discussed yet is the market condition. The local market determines the price of a property. Homes in New York are priced way differently than properties in Chicago. 

Do some research. Get the pricing estimates and reports from your agent. Understand the market. Are you buying into a seller’s market or a buyer’s market? 

In a seller’s market, you may have to make multiple offers before you can buy a home. However, don’t let the circumstances stop you. Be persistent, and you’ll find the right property. Wherever you’re, it is best to save for the maximum down payment, and ensure that you don’t exceed your budget.