How much house you can afford to buy typically boils down to how much of a mortgage you can afford to repay. This is because most Americans turn to mortgages when it comes to becoming homeowners. So, if you plan to purchase a home in the near future, it’s important to determine how much you may afford to borrow based on your existing salary and other factors.
While there’s a clear link between the two, the answer to “How much house can I afford?” is usually not the same as the answer to “How much mortgage can I afford?”
Even if a lender is willing to lend you enough money to buy a house you like, you need to bear in mind that you’ll need to keep making payments regularly and subsist on the rest of your salary until you pay off the mortgage completely. You also need to account for any unexpected expenses that you’ll need to encounter along the way.
Before you think about getting on the path to purchasing a home, you need to establish if you’re better off as a renter or a homeowner. For instance, while buying a home gives you the ability to build equity, not making payments on time comes with the risk of foreclosure. If you have job security and have been consistent in making rent and bill payments, you may think about buying a home.
There are two ways to look at how much you can afford for a mortgage. One rule of thumb suggests that the mortgage amount should not exceed your annual income by more than two and a half times. For example, if you earn $100,000 a year, you may seek a mortgage of up to $250,000.
Another line of thought opines that your monthly mortgage payment should remain less than 30% of your gross monthly income, and this is something lenders look at as well. However, mortgage essentially look at your income and existing debts to arrive at a decision, and they overlook additional costs that might come in the form of income tax, health insurance premiums, saving for children’s college, and pre-tax retirement contributions.
Consequently, limiting your mortgage payments to less than 25% of your monthly income can help you steer clear of being house poor. Data released by Consumer Affairs indicates that:
If paying off your mortgage and maintaining a home account for a significant portion of your income, you might end up with inadequate money to meet discretionary expenses or save for retirement. Remember, an approved mortgage does not imply that it’s an affordable mortgage.
Eligible applicants may qualify for VA loans if the total of their monthly debt and mortgage payments, or their debt-to-income (DTI) ratio, does not exceed 41% of their gross monthly income.
While qualified veterans with full VA loan entitlement don’t have to worry about loan limits, this is not the case with veterans who qualify for reduced VA loan entitlement. In 2022, the standard VA loan limit for most counties across the country stood at $647,200.
Qualifying for a USDA loan requires that you have a DTI ratio of 41% or lower. You might qualify with a higher DTI ratio only in case of significant compensating factors, as listed by the U.S. Department of Agriculture (USDA).
The maximum you may borrow through a USDA loan depends on the county in which you wish to purchase a home. As of March 2022, this number stood at $336,500 for most counties. For Duchess County in New York, the maximum limit was $581,200. The maximum limit for Middlesex, Monmouth, Morris, Ocean, Passaic, Somerset, and Sussex counties in New Jersey was $776,600
Technically, affordability when buying a home depends on your income, home prices, mortgage rates, and monthly mortgage repayments. However, if you find yourself asking, “How much can I afford for a house?” you need to account for a few other factors too.
This includes income that you receive from all sources on a regular basis. Your income plays an important role in determining how much you may afford to spend toward mortgage payments each month.
Looking at all your debt payments and regular expenses gives you an indication of how much money you have left over from your income to make mortgage payments.
Your savings help you make your down payment, so the more you have the better. In addition, you might also need to turn to your savings to meet unforeseen expenses.
Your credit score and the debt you owe give lenders an indication of the level of risk you pose as a borrower. This factor plays a key role in whether a lender approves you for a mortgage. It also has a significant effect on the interest rate you get.
Given that a significant number of homeowners end up cutting costs in various forms, it’s important to determine if you’re willing to make lifestyle changes and live on a tighter budget. If you already have considerable debt and don’t see yourself wanting to cut back on existing expenses, you might want to err on the side of caution.
In Pulp Fiction, when Jules (Samuel L. Jackson) tells Vincent (John Travolta) that “Personality goes a long way,” he seems rather convincing. That’s probably because it’s true to some degree according to a research article on Candidate Personality Traits, Voters’ Profile, and Perceived Likeability.
From the point of view of buying a home, while some borrowers might be okay with the knowledge that they need to pay upward of $5,000 per month toward their mortgages each month, others might spend sleepless nights over significantly smaller payments. Besides, while some might feel perfectly at ease when refinancing their mortgages, the process might seem perturbing to others.
As a result, it’s important to determine just how much you’re okay with borrowing without letting it affect your mental well-being.
Mortgage providers tend to follow different criteria when determining affordability, loan amounts, and interest rates. However, the basics remain the same. You may expect a lender to look at your existing income, debt, and assets, as well as the potential of increased income and debt in the future.
While income, expenses, and the down payment amount have a bearing on how much a lender might be willing to lend, your credit history plays an important role in your ability to qualify for a mortgage and the interest rate.
An important factor that lenders look at to determine how much of a mortgage you can afford, your debt-to-income ratio highlights how much you owe each month in comparison to your gross monthly income. Other than your debt, it takes the rent you pay into account if you don’t have a mortgage. Lenders typically look for debt-to-income ratios of 36% or lower. Of this, your rent or mortgage payment should ideally account for 28% or less.
People with DTI ratios of 43% or higher can find it rather challenging to get a mortgage. In this case, you might want to improve your DTI ratio before you apply for a mortgage.
Arriving at an answer to how much house you can afford requires that you understand the actual cost of homeownership. This is because there’s typically more than what meets the eye, and if you only prepare to make monthly mortgage payments, you might be in for disappointment. Besides, knowing all the associated costs will help you make a better decision.
When asking yourself, “How much house can I afford?” make sure you take all your existing financial obligations and income into consideration. Remember that you need to account for any unexpected expenses that might come your way, and you should ideally have a savings fund that can cover at least six months of your expenses.
If you’re still not sure about how much you can afford for a mortgage, consider discussing your specific situation with a qualified loan officer.
Fill out the form below and a mortgage professional will get back to you shortly.
Considering homeownership but not sure where to begin? The Meadowbrook Financial Mortgage Bankers Corp. guide to home buying will make the process easy all in one packet.
Most American home buyers need to get mortgages to purchase homes, which is where their creditworthiness enters the picture. Even though lenders might rely on…
Buying a home can be an exciting yet daunting process, which is why it’s best to tread with caution. If you find a house you…
Finding out about a denied mortgage application is never easy, given that the person receiving the news is typically looking forward to buying a house.…