How much mortgage can I afford?

Before you can buy a home, you first have to ask yourself a few questions. Like, where do I want to buy? And what type of home am I looking for? What amenities and features are must-haves, and which ones are dealbreakers? And, ultimately, how much mortgage can I afford?

That last question may be the most critical, as it will impact what price range you can consider, as well as both your monthly and long-term costs as a homeowner. 

But how exactly do you determine how much mortgage you can afford? And what will a mortgage lender say you’re actually eligible for? Here’s what you need to know.

How much mortgage can I afford based on income?

To get a rough idea of what you can afford as a homebuyer, start with your monthly income. Most financial experts recommend following the 28/36 rule, which says you should spend no more than 28% of your monthly earnings on housing costs. These include your mortgage payment, primarily, but also utilities, home insurance premiums, taxes and other associated costs. 

The rule also recommends spending no more than 36% of your income across all your debts (mortgage, credit cards, car loans, etc.). 

“Following this rule can provide an easy way to determine whether you are suited for the responsibilities associated with homeownership,” Alex Shekhtman, CEO and founder of LBC Mortgage. “It’s a great tool to help measure how much house you can buy that fits within your budget without putting too much strain on your income.”

How lenders determine how much mortgage you can afford

The 28/36 rule can give you a good pulse on what you can afford as a homebuyer, but that doesn’t mean you will actually qualify for a mortgage of that size. To determine how much you’re eligible for, mortgage lenders look at a number of factors.

First, there’s your debt-to-income ratio. This is similar to the 28/36 rule above, but different types of mortgage loans have specific DTI thresholds. If you’re getting an FHA loan, for example, you could have a mortgage payment of up to 31% of your monthly income and total debt payments of up to 43% of it. In some cases, you may be able to exceed these numbers if you have lots in savings or other factors that make you a lower-risk borrower.

Your credit score also plays a role, too. Higher credit scores show you’re good at managing your debts and may qualify you for a lower interest rate. With a lower interest rate, you can qualify for a larger loan amount. (We’ll go more into this below). 

Finally, your down payment also factors into what you’re eligible for mortgage-wise. Conventional loans require at least 3% down, so with a $24,000 down payment, you could potentially get a loan as big as $800,000. If you had just $6,000 to put down, though, that maximum would shrink to just $200,000.

How your mortgage rate impacts affordability 

Your mortgage rate actually plays a big part in what size mortgage you can get. With a lower mortgage rate, you can get a  bigger loan for the same monthly payment. Higher rates, on the other hand, do the opposite.

Let’s look at an example. Say that, based on the 28/36 rule, you know you can afford roughly a $2,000 monthly mortgage payment. Here’s what that would look like at different interest rates:

Monthly payment Interest rate Total mortgage loan amount Total interest paid over 30 years
~$2,000 5.00% $372,000 $346,911
~$2,000 6.00% $333,000 $385,741
~$2,000 7.00% $300,000 $418,526

 

As you can see above, with a 5% rate, you could afford a loan of about $72,000 higher than you could with a 7% rate. It would also save you about $72,000 in long-term interest costs.

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