Understanding Mortgage Affordability
Determining how much house you can afford involves more than just looking at your income. Lenders evaluate your debt-to-income ratio, credit score, down payment, and other financial factors to decide how much they'll lend you. This calculator uses standard lending guidelines to estimate your home buying budget, but remember that actual approval amounts may vary based on your complete financial profile and the specific lender's requirements.
The 28/36 Rule Explained
Most lenders use the 28/36 rule as a guideline for mortgage qualification. The first number, 28, means your housing expenses should not exceed 28% of your gross monthly income. This includes principal, interest, property taxes, homeowners insurance, and HOA fees. The second number, 36, means your total debt payments including housing, credit cards, car loans, and student loans should not exceed 36% of gross monthly income. This calculator uses these conservative ratios to estimate what lenders will approve.
How Down Payments Affect Affordability
Your down payment directly impacts affordability in multiple ways. A larger down payment means a smaller loan amount, which results in lower monthly payments and less interest over time. Putting down 20% or more eliminates private mortgage insurance requirements, saving hundreds monthly. However, don't drain your entire savings—maintain an emergency fund covering 3-6 months of expenses. Consider that closing costs typically add 2-5% of the home price to your upfront expenses beyond the down payment.
Interest Rates and Buying Power
Interest rates dramatically affect how much house you can afford. A 1% increase in interest rate can reduce buying power by approximately 10%. For example, with a $2,000 monthly housing budget at 6% interest, you might afford a $333,000 home. At 7%, that drops to $304,000—a $29,000 difference. When rates are high, consider adjustable-rate mortgages if you plan to move within 5-7 years, or factor in potential refinancing when rates decrease.
Beyond the Numbers: Hidden Costs
Affordability isn't just about qualifying for a loan—it's about comfortably managing all homeownership expenses. Property taxes vary widely by location and can increase annually. Home insurance costs depend on location, home value, and risk factors. Maintenance typically costs 1-2% of home value annually—that's $3,000-6,000 per year on a $300,000 home. Utilities often run higher in houses than apartments. HOA fees can increase. Budget for these ongoing expenses beyond your mortgage payment to avoid becoming house poor.
Credit Score Impact
Your credit score significantly affects mortgage rates and approval. Borrowers with scores above 740 typically get the best rates—often 0.5-1% lower than those with scores in the 620-680 range. On a $300,000 loan, that 0.75% difference equals about $150 more monthly and $54,000 more in interest over 30 years. Before house hunting, check your credit reports, dispute errors, pay down credit cards, and avoid new credit inquiries. Improving your score by 40-60 points can save tens of thousands over the life of your mortgage.
Special Loan Programs
FHA loans allow down payments as low as 3.5% and accept credit scores as low as 580, making them accessible for first-time buyers. However, FHA loans require mortgage insurance for the loan's life. VA loans for military members offer 0% down with no PMI. USDA loans provide 0% down for rural properties. Conventional loans require 3-20% down, with PMI below 20%, but PMI can be removed once you reach 20% equity. Each program has different requirements and costs—compare them based on your situation.
Pre-Approval vs Pre-Qualification
Pre-qualification provides a rough estimate based on self-reported financial information—it's not a commitment from the lender. Pre-approval involves a full credit check and document verification, giving you a specific loan amount the lender commits to providing. Sellers take pre-approved buyers more seriously because there's less risk the sale will fall through due to financing. Get pre-approved before seriously house hunting to understand your true budget and strengthen your offers in competitive markets.
Once you know your budget, use our mortgage payment calculator to estimate monthly costs for specific homes, or try our extra payment calculator to see how you can pay off your home faster.