Calculator: Start by crunching the numbers
- Figure out how much you (and your partner or co-borrower, if applicable) earn each month. Include all your revenue streams, from alimony to investment profits to rental earnings.
- Next, list your estimated housing costs and your total down payment. Include annual property tax, homeowners insurance costs, estimated mortgage interest rate and the loan terms (or how long you want to pay off your mortgage). The popular choice is 30 years, but some borrowers opt for shorter loan terms.
- Lastly, tally up your expenses. This is all the money that goes out on a monthly basis. Be accurate about how much you spend because this is a big factor in how much you can reasonably afford to spend on a house.
Input these numbers into our Home Affordability Calculator to get a clear idea of your homebuying budget.
Why it’s smart to follow the 28/36% rule
Most financial advisors agree that people should spend no more than 28 percent of their gross monthly income on housing expenses, and no more than 36 percent on total debt. The 28/36 percent rule is a tried-and-true home affordability rule of thumb that establishes a baseline for what you can afford to pay every month. For example, let’s say you earn $4,000 each month. That means your mortgage payment should be a maximum of $1,120 (28 percent of $4,000), and your other debts should add up to no more than $1,440 each month (36 percent of $4,000). What do you do with what’s left? You’ll need to determine a budget that allows you to pay for essentials like food and transportation, wants like entertainment and dining out, and savings goals like retirement.
How much mortgage payment can I afford?
As you think about your mortgage payments, it’s important to understand the difference between what you can spend versus what you can spend while still living comfortably and limiting your financial stress. For example, let’s say that you could technically afford to spend $4,000 each month on a mortgage payment. If you only have $500 remaining after covering your other expenses, you’re likely stretching yourself too thin. Remember that there are other major financial goals to consider, too, and you want to live within your means. Just because a lender offers you a preapproval for a large amount of money, that doesn’t mean you should spend that much for your home.
How to determine how much house you can afford
Your housing budget will be determined partly by the terms of your mortgage, so in addition to doing an accurate calculation of your existing expenses, you want to have an accurate picture of your loan terms and shop around to different lenders to find the best offer. Lenders tend to give the lowest rates to borrowers with the highest credit scores, lowest debt and substantial down payments.
How do current mortgage rates impact affordability?
Over the past year or so, the Federal Reserve repeatedly raised interest rates in an attempt to bring down inflation. It worked — inflation is much lower now than it was, though still not at the Fed’s goal of 2 percent — but it caused mortgage rates to rise in turn. Increased rates often dampen homebuyer enthusiasm, or even drive them out of the market entirely, which ultimately drives the cost of homes down. However, if you’re still in the market to buy a home, higher interest rates mean your monthly mortgage payments will be steeper. As an example, with a 5 percent interest rate, the principal and interest on a 30-year $600,000 mortgage would be $3,220 per month, according to Bankrate’s mortgage calculator. At 8 percent, that figure would go up to $4,402. (After dropping as low as 3.08 percent in late 2020, 30-year fixed mortgage rates hit 7.8 percent in October 2023.)
How does credit score impact affordability?
Your credit score is the foundation of your finances, and it plays a critical role in determining your mortgage rate. For example, let’s say you have a credit score of 750, considered in the “very good” range by FICO. That will put you in the running for a better rate than, say, a lower credit score of 640, which is at the bottom of the “good” range. To find out your score, check your credit report at one of the big three agencies: Equifax, Experian and TransUnion.
How does debt to income ratio impact affordability?
Lenders will also look at your debt-to-income ratio, or DTI, to get a clear picture of how risky it is to loan you money. Simply put, the higher your debt-to-income ratio, the more the lender will doubt your ability to pay the loan back. Lenders have maximum DTIs in place that could stand in the way of getting approved for a mortgage. On conventional loans, for example, lenders usually like to see debt-to-income ratios under 36 percent. Most are willing to go up to 43 percent, and in some cases, 50 percent is the cutoff. If you want to shrink your debt-to-income ratio before applying for a mortgage — which is likely a good idea — pay off your credit cards and other recurring debts, like student loans and car payments.
How to figure out your DTI
Add up your total monthly debt and divide it by your gross monthly income, which is how much you brought home before taxes and deductions. Here’s an example:
- Add up your monthly debt: $1,200 (rent) + $200 (car loan) + $150 (student loan) + $85 (credit card payments) = $1,635 total
- Now, divide your debt ($1,635) by your gross monthly income ($4,000): 1,635 ÷ 4,000 = .40875. By rounding up, your DTI is 41 percent.
- If you get rid of the $85 monthly credit card payment, for example, your DTI would drop to 39 percent.
How much can I afford on my salary?
Let’s say you earn $100,000 each year, which is $8,333 per month. By using the 28 percent rule, your mortgage payments should add up to no more than 28 percent of $8,333, or $2,333 per month.
However, there are a lot of factors that can impact your monthly mortgage outlay, including what kind of loan you have, your interest rate, the cost of property taxes and homeowners insurance in your area, and whether or not you’ll have HOA fees to pay. And don’t forget you’d also need to pay a down payment and closing costs upfront, while keeping enough leftover to cover regular maintenance, upkeep and any emergency repairs that may arise.
How does the amount of my down payment impact how much house I can afford?
The down payment is an essential component of home affordability. The more you put down upfront, the less you need to borrow — so by making a larger down payment, you reduce your loan-to-value ratio, which makes a difference in how your lender looks at you in terms of risk. Bankrate’s mortgage calculator can help you explore how different purchase prices, interest rates and minimum down payment amounts impact your monthly payments. And don’t forget to think about the potential for mortgage insurance premiums to impact your budget. If you make a down payment of less than 20 percent on a conventional loan, you’ll need to pay for private mortgage insurance, or PMI.
How does the type of home loan impact affordability?
While it's true that a bigger down payment can make you a more attractive buyer and borrower, you might be able to get into a new home with a lot less than the typical 20 percent down. Some programs make mortgages available with as little as 3 percent or 3.5 percent down, and some VA loans are even available with no money down at all.
How much house can I afford with an FHA loan?
Federal Housing Agency mortgages are available to homebuyers with credit scores of 500 or more and can help you get into a home with less money down. If your credit score is below 580, you'll need to put down 10 percent of the purchase price. If your score is 580 or higher, you could put down as little as 3.5 percent. There are limits on FHA loans, though. In most areas in 2023, an FHA loan cannot exceed $472,030 for a single-family home. In higher-priced areas, the number can go as high as $1,089,300. You’ll also need to factor in how mortgage insurance premiums — required on all FHA loans — will impact your payments.
How much house can I afford with a VA loan?
Eligible active duty or retired service members, or their spouses, might qualify for down payment–free mortgages from the U.S. Department of Veterans Affairs. These loans have competitive mortgage rates, and they don't require PMI, even if you put less than 20 percent down. Plus, there is no limit on the amount you can borrow if you’re a first-time homebuyer with full entitlement. You’ll need to also consider how the VA funding fee will add to the cost of your loan.
How much house can I afford with a USDA loan?
USDA loans require no down payment, and there is no limit on the purchase price. However, these loans are geared toward buyers who fit the low- or moderate-income classification, and the home you buy must be within a USDA-approved rural area.
How does where I live impact how much house I can afford?
Where you live plays a major role in what you can spend on a house. For example, you’d be able to buy a much bigger piece of property in St. Louis than you could for the same price in San Francisco. You should also think about the area’s overall cost of living. If you live in a town where transportation and utility costs are relatively low, for example, you may be able to carve out some extra room in your budget for housing costs.
I’m a first-time homebuyer. How much can I afford?
Being a first-time homebuyer can be especially daunting: You’re paying rent, so how can you manage to save money for a down payment at the same time? Data from the National Association of Realtors shows that adhering to the 28 percent rule is becoming especially challenging for first-time buyers: In the second quarter of 2023, the typical first-time buyer actually spent more than 40 percent of their income on their mortgage payments. Fortunately, there are many down payment assistance programs designed specifically for first-time homebuyers. Depending on where you live and how much you earn, you may be able to qualify for a grant, low-interest loan or forgivable loan to help with your down payment and/or closing costs.
How to improve your home affordability
Before you start looking at real estate and shopping around for the right lender, it’s important to take these steps to improve your chances of becoming a homeowner without breaking the bank.
- Work to improve your credit score: Boosting your credit score is the best way to put yourself in a position for the lowest mortgage rate possible. Pay down your credit cards and avoid applying for any additional accounts as you prepare to apply for a mortgage.
- Improve your debt-to-income ratio: Work to reduce your debts. You might also focus on making your income bigger by negotiating a pay raise at your current job or getting a second job for additional earnings. Either way, you will demonstrate to a lender that you have more money, which makes you less of a risk.
- Come up with a bigger down payment: The more you can contribute upfront, the less you need to borrow. Your down payment doesn’t all have to come from your own savings, either. If you have a family member or close friend who can afford to, they might give you a gift to add to your down payment. They will need to sign a letter stating that the money is a true gift — not a loan that you’ll need to pay back.
- Consider other locations: You might have your heart set on a certain neighborhood or a certain city, but flexibility is key. If you can cast a wider net, you will open yourself up to places where home prices are lower.
- Figure out how much space you really need: Do you need a 3,500-square-foot home with a sprawling backyard? If this is your first time buying a piece of property, perhaps a starter home is a better bet for your bank account. If you’re years away from having a family, you can always start small, build up equity and sell to find a bigger home when you’re ready. Additionally, consider looking at condos, which have a cheaper median price tag than single-family homes.
What other factors impact home affordability?
- Be prepared for property taxes: When you buy a home, you assume the tax liabilities that come with it. So, in addition to paying off your mortgage, you’ll need to factor in the property taxes that cover your contribution for government services like a police department, firefighting services and public schools. That bill varies widely based on your property’s valuation and where it’s located. For example, the average property tax bill for a single-family home in New Jersey was $9,527 in 2022. That figure amounts to more than 10 times the average $928 property tax bill for homeowners in West Virginia, according to data from ATTOM.
- Set aside an emergency fund: Life happens — and sometimes, that means bad things happen. In addition to making your regular mortgage payments, you’ll need to stash away money in case, for instance, you lose your job. Your emergency fund provides a layer of protection in a worst-case scenario.
- Budget for ongoing repair-and-maintenance costs: When you’re a renter, a plumbing problem is your landlord’s responsibility. When you’re an owner, it’s yours. How much you’ll need to spend depends on how old the home is, but even brand new construction will require continued investment for upkeep.
- Shop around for homeowners insurance: When you buy a house, you need to make sure it’s protected in the event of a disaster. Homeowners insurance premiums vary widely depending on what you need in your policy and where you live. They are especially high in states prone to natural disasters, like Florida and California. Be sure to compare multiple quotes to get solid coverage at a decent price.
Should I buy a home now or wait?
Home prices have been on a rollercoaster ride in recent years and are still very high, as are mortgage rates. It’s enough to make you wonder whether now is even a good time to buy a house. It’s important to focus on your personal situation rather than thinking about the overall real estate market. Is your credit score in great shape, and is your overall debt load manageable? Do you have enough savings that a down payment won’t drain your bank account to zero? If your personal finances are in excellent condition, a lender will likely be able to give you the best deal possible on your interest rate.
It’s not just about money, though. Think about what’s on the horizon for you. Are you comfortable planting roots for the foreseeable future? The longer you can stay in a home, the easier it is to justify the expenses of closing costs and moving all your belongings — and the more equity you’ll be able to build.
Bottom line
Don’t let rising home prices automatically scare you away. Being able to purchase a property starts with these questions:
- Do you pay your bills on time? A history of no late payments will make you look good in the eyes of any lender. They’ll know that they can expect to receive your mortgage payment each month when it’s due.
- Do you have proof of steady income? If you have a steady job that deposits a similar amount into your checking account every two weeks, you’re in good shape. Lenders will evaluate your bank accounts, review recent pay stubs and look at your tax forms. If you’re self-employed or earn irregular income, you’ll need to show even more evidence of your earnings — likely the past two years of tax returns.
- Do you have a low debt-to-income ratio and a high credit score? If you’re earning a lot more money than you’re paying back for other debt, with a credit score that shows you’re credit-worthy, you’re in a good position.
- What’s the best mortgage rate you can get? The lower your rate, the more you’ll save on interest payments. The good news: If you answered yes to the previous three questions, you’ll likely qualify for the lowest rates a lender can offer.
