How Much House Can You Really Afford
Many or all of the products featured here are from our partners who compensate us. This may influence which products we write about and where and how the product appears on a page. However, this does not influence our evaluations. Our opinions are our own. Here is a list ofour partnersandhere’s how we make money.
Youve shopped multiple lenders to find your best mortgage rate, and now youre expecting your preapproval letter. If youre a first-time homebuyer, its natural to hope for a large number you want to qualify for as much house as possible. But instead of looking for a big, juicy home value with your name on it, you might want to focus on a smaller, easy-to-swallow figure: the monthly payment.
Rather than committing to the largest possible mortgage, sign up for a monthly payment you can really afford. Heres how that can work.
How Do I Use The Maximum Mortgage Calculator
To use our maximum mortgage calculator, all you have to do is:
- Input the interest rate you expect to pay on your mortgage.
- Select your loan term from the drop-down menu. The loan term represents the number of years itll take you to repay your mortgage.
- Input your monthly income and that of your co-borrower. That could be your spouse, next-of-kin, etc.
- Under the Monthly Liabilities section, put in any usual repayments that you have to make on a monthly basis.
- Under the Monthly Housing Expenses section, select the appropriate answers from the list provided.
Figure Out 25% Of Your Take
Lets say you earn $5,000 a month . According to the 25% rule we mentioned earlier, that means your monthly house payment should be no more than $1,250.
Stick to that number and youll have plenty of room in your budget to tackle other financial goals like home maintenance and investing for retirement.
There Is No Standard Threshold Foir
The threshold ratio may vary across banks and may not even be disclosed. As I understand, not many banks would be comfortable once the FOIR breaches 50%. However, it is possible that banks may make exceptions for very high income or high net worth individuals. And I can see reasons for the same.
Lets consider an example. Ashish earns Rs 50,000 per month and Ramesh earns Rs 5 lacs per month. Neither has any loan. You can expect fixed expenses to be a fairly high portion of Ashishs monthly income. The same cannot be said for Ramesh. At such high level of income, he may be saving much more . Therefore, it is possible that the bank may restrict Ashish to a FOIR of 40% while it may go up to 60% for Ramesh.
A similar argument can be extended to High Net-worth individuals. Note that this is a conjecture. Banks have different policies for determining loan eligibility.
Budget For Homeowner Costs
Beyond the costs of purchasing a home, youll likely have expenses related to owning and maintaining your home:
Lenders will require that you carry homeowners insurance, which protects your property in case of damage. The amount will vary depending on your homes value and location. Certain areas that are prone to floods or earthquakes may have higher premiums.
You will also pay property taxes to your local government. This amount is based on the value of the property and land and is used to cover costs such as infrastructure, school, law enforcement, and fire service.
Maintenance and repairs
Maintenance includes the ordinary expenses that come with owning a home, such as painting, taking care of a lawn, fixing appliances, and cleaning living spaces. The average homeowner spent $2,289 a year on maintenance and repairs in 2016, according to Bureau of Labor StatisticsConsumer Expenditure Survey. If youre preparing your home for sale or just curious about general upkeep, review our home maintenance and repair checklist.
The average Homeowners Association fee is $200 to $300 per month for a typical single-family home, according to Realtor.com. This money usually covers shared amenities and services for a community such as a pool or gym, trash removal, snow removal, or maintenance to common areas.
You May Like: Does Va Loan Work For Manufactured Homes
Documentation Required To Get Pre
To get a full pre-approval, youll need to be prepared to provide the following documentation:
- Pay stubs Youll need to provide your most recent pay stub, which must show your year-to-date earnings. Youll need a pay stub for each job you have, and for each person applying for the pre-approval.
- W2s Many mortgage lenders will require your W-2 for at least the most recent calendar year. However, some lenders may require them for the past two years.
- Completed, signed income tax returns Youll need to provide these if youre self-employed, or have substantial real estate, investment, or partnership income. They should include all pages of IRS Form 1040, including schedules.
- Asset statements For bank accounts or taxable investment accounts, youll need to provide statements covering the most recent two months, or the most recent quarter. For retirement accounts, youll need to provide something similar.
- Gift information If some or all your down payment will come from a gift, youll need to provide the amount of the gift, when it will be available, who the donor will be, and what their source of funds for the gift will be. The lender will likely request that the donor complete a formal mortgage gift letter, that will request specific details.
- This can usually be satisfied by providing your drivers license. In some cases, the lender may request a copy of your Social Security card. These documents will be requested to verify your identity for federal compliance purposes.
Home Affordability Begins With Your Mortgage Rate
You will probably notice that any home affordability calculation includes an estimate of the mortgage interest rate you will be charged. Lenders will determine if you qualify for a loan based on four major factors:
If lenders determine you are mortgage-worthy, they will then price your loan. That means determining the interest rate you will be charged. Youryoull get.
Naturally, the lower your interest rate, the lower your monthly payment will be.
See Your Credit Scores From All 3 Bureaus
Do you know what’s on your credit report?
Learn what your score means.
FHA.com is a privately-owned website that is not affiliated with the U.S. government. Remember, the FHA does not make home loans. They insure the FHA loans that we can assist you in getting. FHA.com is a private corporation and does not make loans.
How To Use The Mortgage Affordability Calculator
To use our mortgage affordability calculator, simply enter you and your partners income , as well as your living costs and debt payments. The calculator can estimate your living expenses if you dont know them.
With these numbers, youll be able to calculate how much you can afford to borrow. You can change your amortization period and mortgage rate, to see how that would affect your mortgage affordability and your monthly payments.
Read Also: How To Transfer Car Loan To Another Person
Being Careless With Credit
A mortgage lender will pull your credit report at preapproval to make sure things check out and again just before closing. Your lender wants to make sure nothing has changed in your financial profile.
How this affects you: Any new loans or credit card accounts on your credit report can jeopardize the closing and final loan approval. Buyers, especially first-timers, often learn this lesson the hard way.
What to do instead: Keep the status quo in your finances from preapproval to closing. Dont open new credit cards, close existing accounts, take out new loans or make large purchases on existing credit accounts in the months leading up to applying for a mortgage through closing day. Pay down your existing balances to below 30 percent of your available credit limit, if you can, and pay your bills on time and in full every month.
How The Loan You Choose Can Affect Affordability
The loan you choose can also affect how much home you can afford:
- FHA loan. Youll have the added expense of up-front mortgage insurance and monthly mortgage insurance premiums.
- VA loan. You wont have to put anything down and you wont have to pay for mortgage insurance, but you will have to pay a funding fee.
- Conventional loan. If you put down less than 20%, private mortgage insurance will take up part of your monthly budget.
- USDA loan. Both the upfront fee and the annual fee will detract from how much home you can afford.
Don’t Miss: What Is The Maximum Fha Loan Amount In Texas
Negotiate With The Seller
You may be able to save money by asking the seller to pay for repairs in advance or lower the price to cover the cost of repairs youll have to make later. You may also ask the seller to pay some of the closing costs. But keep in mind that lenders may limit the portion of closing costs the seller can pay.
Your negotiating power will depend on the local market. It’s tougher to drive a hard bargain when there are more buyers than homes for sale. Work with your real estate agent to understand the local market and strategize accordingly.
Most Affordable Markets For Homebuyers
According to 2020 data fromZillow Research, record low mortgage rates have helped to boost affordability for potential homeowners. The table below shows the top 10 most affordable markets to live in for December 2020 and is based on a typical home value of no more than $300,000 . The market and share of income spent on a mortgage may fluctuate based on the current mortgage rate, the typical local homeowner’s income and the typical local home value.
Read Also: Genisys Loan Calculator
Choose A Real Estate Agent Carefully
A good real estate agent will scour the market for homes that meet your needs and guide you through the negotiation and closing process. Get agent referrals from other recent home buyers. Interview at least a few agents, and request references. When speaking with potential agents, ask about their experience helping first-time home buyers in your market and how they plan to help you find a home.
» MORE: How to find a real estate agent
Two Types Of Conventional Loans
- Conforming Conventional Loans: Conventional mortgages follow assigned loan limits established by the Federal Housing Finance Agency . In 2021, the maximum conforming limit for a single-unit home in the U.S. continental baseline is $548,250. If this is the maximum conforming limit in your area, and your loan is worth $350,000, your mortgage can be sold into the secondary market as a conventional loan. We publish maximum conforming limits by county across the country.
- Non-conforming Conventional Loans: Also called jumbo loans, non-conforming conventional mortgages exceed the assigned conforming loan limits set by the FHFA. These loans are used by high-income buyers to purchase expensive property in high-cost locations. The conforming loan limit for high-cost areas are 50% higher than the baseline limit, which is $822,375 for single-unit homes as of 2021. Jumbo mortgages have stricter qualifying standards than conventional loans because larger loans exact higher risk for lenders.
PMI on Conventional Loans
Private mortgage insurance or PMI is required for conventional mortgages when your down payment is less than 20% of the homes value. This is an added fee that protects your lender if you fail to pay back your loan. PMI is typically rolled into your monthly payments, which costs 0.5% to 1% of your loan per year. Its only required for a limited time, which is canceled as soon as your mortgage balance reaches 78%.
Also Check: How Do I Refinance An Auto Loan
Cash Reserve And Your Ability To Pay Your Mortgage
The table above is for a $250,000 home in Kansas City, Missouri. The mortgage payments assume a 20% down payment, and they include property taxes and home insurance.
Think of your cash reserve as the braking distance you leave yourself on the highway – if thereâs an accident up ahead, you want to have enough time to slow down, get off to the side or otherwise avoid disaster.
Your reserve could cover your mortgage payments – plus insurance and property tax – if you or your partner are laid off from a job. It gives you wiggle room in case of an emergency, which is always helpful. You donât want to wipe out your entire savings to buy a house. Homeownership comes with unexpected events and costs , so keeping some cash on hand will help keep you out of trouble.
How To Calculate Affordability
Zillow’s affordability calculator allows you to customize your payment details, while also providing helpful suggestions in each field to get you started. You can calculate affordability based on your annual income, monthly debts and down payment, or based on your estimated monthly payments and down payment amount.
Our calculator also includes advanced filters to help you get a more accurate estimate of your house affordability, including specific amounts of property taxes, homeowner’s insurance and HOA dues . Learn more about the line items in our calculator to determine your ideal housing budget.
Read Also: How Much To Loan Officers Make
Clear Your Existing Loans
If you have existing loans and other financial obligations, your lender is likely to lower your loan amount. This is because financial lenders assess home loan eligibility based on a debt-to-income ratio. You can improve your debt-to-income ratio by paying off all existing loans and credit debts before applying for a home loan.
Save A Bigger Down Payment To Make Your Home More Affordable
Remember, your down payment amount makes a big impact on how much home you can afford. The more cash you put down, the less money youll need to finance. That means lower mortgage payments each month and a faster timeline to pay off your home loan! Just imagine a home with zero payments!
Now, were always going to tell you that the best way to buy a home is with 100% cash. But if saving up to pay in cash isnt reasonable for your timeline, youll probably wind up getting a mortgage.
If thats you, at the very least, save up a down payment thats 10% of the home price. But a better idea is to put down 20% or more. That way you wont have to pay private mortgage insurance .
PMI protects the mortgage company in case you dont make your payments and they have to take back the house . PMI is a yearly fee that usually costs 1% of the total loan value and isyou guessed ityet another expense thats added to your monthly payment.
Lets backtrack for a second: PMI may change how much house you thought you could afford, so be sure to include it in your calculations if your down payment will be less than 20%. Or you can adjust your home price range so you can put down at least 20% in cash.
Trust us. Its worth taking the extra time to save for a big down payment. Otherwise, youll be suffocating under a budget-crushing mortgage and paying thousands more in interest and fees.
Also Check: Rv Loan 600 Credit Score
How To Use A How Much Can I Borrow Mortgage Calculator
With this calculator, you can run some what-if scenarios. For example, you may consider:
How long will I live in this home? That can greatly impact your decision on whether to choose a 30-year fixed rate loan or a shorter term. The longer term will provide a more affordable monthly payment, but youll pay a lot more interest over the long term. A 15-year fixed-rate mortgage will cost you way less interest over the life of the loan, but your monthly payment will be considerably more.
Is an adjustable-rate mortgage a better option for me? If you plan on being in this home for just a few years, a 5/1 ARM could be a good option. Youll enjoy a lower initial interest rate thats fixed for five years, but the rate changes annually after that.
Am I trying to buy too much house? Sure, lenders may be more than happy to put your name on a big loan, but how do you feel about it? Are you comfortable with how it may impact your monthly budget, or are you feeling a bit stretched? Consider how your new home costs may impact your other spending goals, such as travel and savings.
How much of a down payment should I make? Its always the big question. Are you putting down as little as possible and having to make up for it with larger monthly payments and possibly having to pay mortgage insurance?
Major Factors That Influence Mortgage Eligibility
When qualifying for a mortgage, lenders rely on standard indicators that determine whether a borrower can repay a loan. These financial factors also influence how much they are willing to lend borrowers. Lenders will thoroughly evaluate your income and assets, credit score, and debt-to-income ratio.
Don’t Miss: Usaa Auto Loan Pre Approval