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How Much Mortgage and House Can I Afford?

Mortgage Affordability Calculator

You can use the calculator below to roughly estimate the maximum amount of mortgage financing for which you may qualify. This calculator uses broad rules of thumb for the maximum amount of your income that a lender may allow you to devote to your proposed housing expenses and other obligations. Your actual qualifying amount may vary considerably from this estimate due to some of the reasons discussed below.

Home Mortgage Affordability Factors

Assuming that your credit history is adequate to qualify for a mortgage, there are two main factors that determine how much house you can afford to buy:

The amount of money you can contribute to the purchase in the form of a down payment;
The amount of monthly housing expenses your income can support.

Down Payment Requirements

Until very recently, many loan programs were available that were compatible with little or no down payment. This situation has changed dramatically. It is now difficult to find a loan if you are putting less than 20% down unless one of two things is true:

Your credit score is high (usually above 720), or
You can qualify for an FHA loan, even with lower credit scores.

The FHA loan program permits very small down payments (currently 3.5% of the purchase price), which is why it has been so popular for over four decades.

The most common source of money for a down payment is usually your savings. Savings can be in the form of money in the bank, investments, equity in an existing home, or expected sales proceeds from some other asset you own, such as collectors items or a car. As long as the money can be verified, it may be used for a down payment.

Another down payment source that is frequently used in conjunction with FHA financing is "gift" money. This is money that is provided to the home buyer from a family member to help buy a house. Lenders allow gifts to help with some of the down payment (or all of it, in the case of FHA loans) as long as the gift can be documented. This means there must be a gift letter attesting to the gift, and the funds must be verified as coming from the family member's account and going into your account (or into the home purchase escrow account).

Monthly Payment Limits

The amount of money you can spend each month on a mortgage payment is determined by several factors.

Payment-to-Income Ratio

First, lenders specify a maximum ratio between the proposed housing payment and your income. In the case of the FHA loan program, that ratio is 31%. For example, if your family earns $6,000 per month in total, a lender would feel comfortable with a total payment of around $1,860. That total payment, however, needs to include not only the principal and interest on the loan, but also must include several other items, including property taxes, homeowners insurance, mortgage insurance, and, if the property is a condominium, home owners association dues.

Total Obligations Ratio

Besides the ratio of housing expense to income, another factor affecting how much a lender will let you spend is the amount of your other monthly financial obligations. If you have a modest amount of other bills, such as a car payment, student loan or credit card payments, these other bills will not affect the monthly housing payment you'll be allowed to make. For FHA loans, lenders usually allow a ratio of 43% of your monthly income in total obligations, including your housing expense of 31%. That leaves 12% for other recurring bills.

Since each borrower is unique, these rules are not carved in stone. Instead, they are guidelines to be applied judiciously by loan underwriters. In reality, many FHA loan applications are approved each day in which payment-to-income ratios exceed the 31/43 limits. However, exceptions are usually granted because the loan application is considered strong in some way, and therefore "compensating factors" are present to offset payment ratios which exceed the norm.

Loan Term

A third factor affecting affordability is the loan term. Although loans with terms as short as ten or fifteen years are available, most borrowers opt for a 30 year term. A 30 year loan leads to the lowest payment, so for a given payment amount, a 30 year loan will let you buy the most home.

Current Mortgage Rates

Interest rates are a fourth factor that determines how much you can buy. The lower the interest rate on your loan, the greater the loan amount for a given monthly payment amount. Current home loan rates are close to the lowest levels we've seen in many years, so today's buyers can obtain greater financing leverage than those of a few years ago.

Please note that a variety of additional factors may come into play when you actually apply for a loan that could increase or decrease the maximum loan amount for which you qualify. Those factors include you credit history, employment history, loan program type, and more.

Find Out Exactly How Much You Qualify For

To estimate your maximum loan amount and purchase price, try using our home affordability calculator, above. Or, better yet, contact us to discuss the details of your situation. We can give you a quick verbal pre-qualification over the phone. If you would like formal pre-approval of your loan before you shop for a home then ask us for a written pre-approval. There is no obligation and no charge for either service.

Disclaimer

Our calculator is provided as a convenience to help you roughly estimate your potential maximum loan amount. The calculator does not take into consideration certain factors that we would need to know in order to actually determine a firm loan amount for which you would qualify. Any information you obtain by using this calculator is for informational purposes only and does not in any way represent a loan approval or an obligation to provide financing.