How Much House Can You Afford?

How to determine the maximum loan amount for which you qualify

How much can you afford to buy a home? This is not an easy question because there are too many different factors involved, including your own financial situation, the kinds of mortgages available in your area, and variations in the qualification guidelines for different mortgages. With all the innovative mortgages available today, there is no simple, accurate formula that can tell you how big a mortgage you can qualify for.

However, you need to have at least an idea of how much a home you can look for before you start home shopping, right? There are ways of making an estimate.

Using Debt-to income ratios

Mortgage lenders generally look at two ratios to determine how much you can afford to spend each month on your mortgage payment.

• Housing Expense Ratio: Generally, your monthly housing costs, including your mortgage payment, taxes, insurance and other fixed expenses, should not exceed 25 to 28 percent of your total monthly income (before tax). If you don't know what your tax and insurance expense will be, you can estimate that about 15 percent of your payment will go toward this expense. To calculate your housing expense, multiply your annual income by 0.28, then divide by 12 (months). The answer is your maximum housing expense.
  
  <Example>
  If your annual gross income (before tax) is $100,000,
  $100,000 x .28 / divided by 12 = $ 2,333
  Your maximum housing expense is $ 2,333
  
  
  
• Total Debt-to-Income Ratio: Your monthly housing costs plus other long-term debt (expenses extending more than 10 months into the future) such as car or other installment loans should not exceed more than 36 percent of your gross (before taxes) monthly income. To calculate your debt-to-income ratio, multiply your annual salary by 0.36, then divide by 12 (months). The answer is your maximum allowable housing expense plus long-term debt.
  
  <Example>
  If your annual gross income (before tax) is $100,000,
  $100,000 x .36 / divided by 12 = $ 3.000
  Your maximum housing expense plus long-term debt is $ 3.000

Again, there are hundreds of loan programs available in today's lending market and every one of them has different guidelines. There may be more or less flexibility depending on your individual situation, too. So don't be discouraged if your dream home seems out of reach.

Online Calculator

If math is not your favorite subject, you can use our affordability calculator. If you input some numbers, it will calculate your maximum affordable home purchase price and loan amount as well as your monthly payment.

Use Affordability Calculator

Ask the lender: Pre-qualification/Pre-approval

Another good way of finding how much house you can afford is to ask a lender. You can get a pre-qualification, which is a free instant assessment using general guidelines, based on the information you provide. The mortgage lender will do some quick calculations on the computer using details you provide. The whole process may take only minutes or you can get instant pre-qualification on-line. No commitment is involved.

If you want to make it sure, you can get a pre-approval from a lender. The mortgage lender will review your credit history, earnings information, employment history and assets and will give you a "pre-approval letter," which says you have the ability to qualify for a certain mortgage amount. Because pre-approval carries the lender’s commitment, many mortgage experts recommend homebuyers to get pre-approved, not just to get pre-qualified.

More Info: Pre-approval