Home affordability comes down to two things: 1. How much room you have in your budget after expenses and 2. How much a mortgage lender says you can afford based on your income, debt and down payment savings.
Understanding the difference — and then using a home affordability calculator to crunch some numbers — will help you decide how much house you can really afford.
Follow these four easy steps to figure out how much home you can afford:
Step 1: Enter your annual gross income
Your gross income is the amount you earn each year before taxes or deductions. The mortgage affordability calculator will divide that number by 12 to come up with your gross monthly qualifying income.
Step 2: Add up your monthly debt
Make sure you include your student loan, credit card and car loan payments, along with any other monthly expenses that show up on your credit report. Lenders divide your total monthly debt payments by your income to determine your debt-to-income (DTI) ratio — it’s one of the most important factors to help determine how much home you can afford.
Step 3: Pick a down payment
Your down payment is upfront money you pay to buy a home. In general, the higher your down payment, the higher the home price you can qualify for. Most loan programs require at least a 3% to 3.5% down payment. However, some programs like those backed by the U.S. Department of Veterans Affairs (VA) and the U.S. Department of Agriculture (USDA), offer no-down-payment programs to eligible borrowers. If you’re not sure, type in how much money you’ve saved or could save for a down payment. Don’t forget, you can also get a gift for your down payment.
Step 4: Choose your loan term
Your loan term is how many years it takes to pay off your mortgage. LendingTree’s home affordability calculator reflects the house price you can afford based on a 30-year fixed-rate mortgage, as it offers the lowest stable payment. However, you can choose a 15-year fixed-rate term if you want to save money on interest and can afford a higher payment. The catch: You’ll qualify for a less-expensive home.
The bottom line: While the home affordability calculator gives you an idea of what you might qualify for, you’re better off getting a mortgage preapproval if you’re looking for a dollar amount based on your unique financial circumstances.
MORTGAGE CALCULATOR TIP
Our calculator is pre-set to a “conservative” 28% DTI ratio. You can slide the bar up to an “aggressive” 50% DTI ratio to see how much more home you can buy. However, be sure your budget can handle the extra debt — lenders don’t look at expenses like utilities, car insurance, phone bills, home maintenance or groceries when they qualify you for a home loan. Lenders may also require a higher credit score, or extra mortgage reserves to cover a few month’s worth of mortgage payments, if the high payment becomes unaffordable.
BOOST YOUR CREDIT SCORE
Your credit score measures your current and past history of managing credit.
The new benchmark for the best rate has been raised to 780 for conventional mortgages. That’s a 40 point increase from the previous standard of 740. Keep your credit card balances low, pay everything on time and avoid opening a lot of new credit accounts. A lower interest rate equals a lower payment, which allows you to buy a more expensive home.MAX OUT YOUR MONTHLY INCOME
Two incomes are better than one, so if you can cosign with someone you’ll have more borrowing power. Don’t forget that side hustle income — you can use it if your tax returns show part-time income for the last two years.
MAKE A BIGGER DOWN PAYMENT
The best way to boost your home affordability is to make a bigger down payment. Your loan amount and mortgage payment will be lower, and the money doesn’t all have to be from your own funds. You can get a gift from a relative, take a loan out against your 401(k) or combine your down payment with down payment assistance programs.
REDUCE YOUR MONTHLY DEBT
Lenders take a look at how much debt you have now, and how much you’ll have with your new mortgage payment. The less debt you have, the more house you can afford.
A DTI ratio above 40% may lead to a higher conventional rate or more closing costs after Aug. 1.CHOOSE A LONGER LOAN TERM
You’ll be able to afford a bigger home with a longer repayment term, such as 30 years. However, a shorter term can save you thousands in interest charges, if the higher payment doesn’t strain your monthly budget.
CONSIDER DIFFEERENT LOAN PROGRAMS
Government loan programs let you stretch your DTI ratio out higher, even if you have a low credit score. However, they come with higher mortgage insurance costs or guarantee fees that could affect how much you can afford.
Conventional loans are popular for borrowers with credit scores of at least 620 and DTI ratios of 45% or less (though exceptions are possible up to a 50% DTI ratio). Some conventional loan programs allow down payments as low as 3%, but you can avoid mortgage insurance if you make at least a 20% down payment. Conventional lenders often charge mortgage insurance to cover their losses if you default, and it’s usually part of your monthly payment.
First-time homebuyers with bumps in their credit history often choose loans insured by the Federal Housing Administration (FHA) to purchase a home. Borrowers with credit scores as low as 580 may qualify with a 3.5% down payment, while a score between 500 and 579 will require at least a 10% down payment. One big FHA loan drawback: You have to pay mortgage insurance regardless of your down payment, which may hamper your ability to buy a more expensive home.
Eligible military borrowers often choose VA loans because they don’t require a down payment or mortgage insurance. While the U.S. Department of Veterans Affairs (VA) doesn’t set a minimum credit score, most VA-approved lenders require at least a 620 score. VA borrowers may have to pay a funding fee of up to 3.6% of their loan amount, unless they are exempt because of a disability related to their military service.
THINGS YOU SHOULD KNOW
The VA loan program is the only standard loan type that considers “residual income,” which is how much free cash you have after deducting expenses from your take-home (after-tax) pay. VA-approved lenders also use residual income to determine how much you can afford, VA-approved lending guidelines suggest a 41% maximum DTI ratio, but if you meet the residual income requirement, you may be approved with a higher DTI ratio.
Low- to moderate-income homebuyers searching for houses in USDA-designated “rural” areas may qualify for no-down-payment financing. The minimum score is typically 640, and buyers pay an annual and upfront guarantee fee instead of mortgage insurance. Strict income limits may cap how much home you can buy with a USDA loan, even if you meet the standard 41% DTI ratio requirement.
How much of your paycheck is left after all of your monthly spending gives you a good idea of how much house you can afford. A mortgage lender will tell you how much you afford based on the minimum mortgage requirements, but relying on those rules may not be a good idea for several reasons:
Financial planners often mention the 28/36 rule when it comes to home affordability. The 28 is a recommended DTI ratio for your mortgage payment compared to your gross income. Lenders call this your “front-end” DTI ratio. The 36 represents your mortgage payment plus other debt like car payments, credit cards, student loans or other accounts that appear on your credit report. In lender lingo this is your “back-end” DTI ratio.
Here’s an example of how it works, assuming you make $6,250 per month ($75,000 per year).
| Calculation step | The math | What the results mean |
|---|---|---|
| Multiply $6,250 by 28% | 6,250 x 0.28 = $1,750 | Your total monthly payment, including taxes and insurance, should not be higher than $1,750. |
| Multiply $6,250 by 36% | 6,250 x 0.36 = $2,250 | Your total monthly debt including your mortgage payment should not be higher than $2,250. |
Additional things that can impact how much house you can afford include:
Timing the real estate market is like timing the stock market — it can rise and fall due to unexpected forces outside of your control. If you’re comfortable with the monthly payment and plan to live in the home for several years, buying is usually a good financial investment.
Lenders use a principal, interest, taxes and insurance (PITI) figure to calculate your debt-to-income ratio. The insurance component may include mortgage insurance, which is usually paid as part of your monthly payment. The higher your PITI payment, the less you can afford.