How expensive of a house can i afford

It is important to assess how much home loan you are eligible for before you start the application process. Understanding this will help you manage your finances and ensure that you are able to pay your EMIs on time without putting a strain on your budget.

You can easily check your home loan affordability through free online home loan affordability calculators on the websites of leading and reputed banks. Most of these calculators have sliders or boxes for different factors that affect your home loan affordability. These categories may include age, down payment, gross monthly income, tenure, interest rate, other EMIs, etc.

Here is an example:

For a 30-year-old individual who has a net adjusted monthly income of Rs.50,000, with other EMIs of Rs.5,000, making a down payment of Rs.1 lakh, if the rate of interest is 8% p.a. and loan tenure is 30 years, the loan amount that is computed as affordable is Rs.9 lakh.

The advantage of using home loan affordability calculators is that you can narrow down your search on properties that fit into your budget. You can also organise your finances better when you know how much down payment you will have to make and how much you will have to pay as Equated Monthly Instalments (EMIs).

What affects home loan affordability?

Home loan affordability is influenced by a variety of factors such as those given below:

1. Age: A younger individual has a higher chance of getting a higher loan amount and being approved for a loan as he has more number of years ahead and his earning ability may increase with age. An older individual, on the other hand, may have lesser number of earning years ahead of him with his earning capacity reaching a plateau soon.
2. Income: Your income is a crucial factor in your home loan affordability. Your take-home salary after deductions and tax will give you a better picture of how much you can comfortably repay.
3. Income stability: An individual with a steady and stable income is more likely to get a loan than one with an irregular income.
4. Expenses: Your monthly expenses will have to be taken into account before you decide how much loan you can afford to take.
5. Existing EMIs: Existing loans and their EMIs are an important factor when calculating your home loan affordability. To increase it, you could consider closing existing loans so that you have more cash on hand to pay for a home loan.
6. Credit score: A higher credit rating makes the loan approval process faster and easier and vice versa.
7. Rejected loan applications: If you have had prior loan applications rejected, it will negatively impact your credit score.
8. Collateral/security: Any collateral like land or gold that can be used as security will increase your chances of getting a loan and a higher amount as a secured loan is a lot less riskier than an unsecured one.

FAQs

1. Will my application be rejected if I have a low credit score?

   This will depend on the discretion of the bank, but it is safer to improve your credit score and then apply for the home loan.

2. How much percentage of my total income can I safely earmark for home loan EMIs?

   It would be safe to put aside 45% to 50% of your total income exclusively for EMIs.

3. How can I reduce my loan EMIs?

   The best way to reduce your EMIs is by prepaying the loan as much as possible whenever you get a lump-sum amount, such as through bonuses, inheritance, surplus funds, etc.

Resources

Calculator

• Home Loan EMI Calculator
• Home Loan Eligibility Calculator
• Home Loan Balance Transfer Calculator
• Home Loan Prepayment Calculator
• Home Loan Repayment Calculator
• Land Conversion Calculator
• Home Loan Affordability Calculator
• PMAY Subsidy Calculator

How much house you can afford is directly related to the size and type of mortgage you can qualify for. Understanding how much you can comfortably spend on a new mortgage while still meeting your existing obligations is crucial during the home-buying process.

Read on to learn about home affordability, and use our home affordability calculator to find out if you can afford the house of your dreams.

Home affordability calculator

In this guide, we cover:

• How much home can I afford?
• How to calculate your home affordability
• Ways to improve your house affordability
• Related articles on home affordability

How much home can I afford?

Purchasing a home is a decision that will impact your financial situation for the next 15 to 30 years. It’s important to calculate your monthly income and expenses carefully to avoid winding up with a mortgage loan you can’t pay in the long run.

And, if you’re ready to buy, visit our best mortgage lenders page to find the right lender for you.

How much house you can afford will mainly depend on the following:

• Your loan amount and mortgage term

• Your gross monthly and annual income

• Your total monthly debt or monthly expenses, including credit card debt, student loan payments, car payment, child support, and other expenses

• State property taxes, which are paid annually or biannually and vary by state

• Current mortgage rates and closing costs, which vary by location

• Homeowner’s association (HOA) and condo fees

Generally, most new homebuyers will consider taking out a conventional mortgage loan. These loans typically require a down payment of no less than 3% of the property value, a minimum credit score of 620, a debt-to-income ratio of 36% and that the monthly payment doesn’t exceed 28% of the buyer’s pre-tax income.

Lenders will also look at a buyer’s ability to deal with all the fees and upfront costs associated with buying a home, such as closing costs and insurance fees.

If you believe you’re ready to buy, visit our best mortgage lenders page to find the right lender for you. However, you can also take a look at other types of loans you may qualify for that have less restrictions or other benefits.

How much house can I afford with an FHA loan?

Depending on your current financial situation and your credit score, a loan insured by the Federal Housing Administration — known as an FHA loan — can give you the opportunity to purchase a home with less restrictions than a regular mortgage.

FHA loans feature maximum qualifying ratios of 31/43 for most applicants with a credit score higher than 500 — this means that no more than 31% of your income should go to housing costs while 43% should be allocated to total debt. Most loans require a 28/36 ratio. This makes FHA loans ideal for those who might have less income or a shorter credit history.

If your credit score is over 580, you may be allowed to have a ratio as high as 40/50 with this type of loan, as long as you meet other requirements.

Borrowers with a credit score of 580 and above could also pay as little as 3.5% as a down payment, lower than the typical 5% or higher with a non-FHA loan.

How much house can I afford with a VA loan?

While the maximum debt-to-income ratio is set at 41% in the general guidelines for VA loans, the VA backs loans for people with higher ratios provided they meet other requirements. VA loans don’t have credit score requirements (although the credit score will still affect the borrower’s interest rates) and borrowers can qualify for a 0% down payment.

How much house can I afford with a USDA loan?

USDA loans for qualifying rural areas are much more flexible than regular loans. They don’t require a down payment and can include the mortgage insurance fee in the loan. This means you can actually finance 102% of the value of the house and avoid paying this fee upfront.

Keep in mind, however, that there are parameters for income eligibility (borrower must earn a maximum of 115% of the median household income) and for the price and size of the house itself. Even if you can afford a certain amount, the eligibility might be for a less expensive home.

In order to see these requirements in detail, you can go to the USDA website and look at the qualifying areas and income by county.

How to calculate your home affordability

There are several methods for figuring out your home affordability. The easiest way is to enter your information into our calculator above. Our home affordability calculator works with either your debt-to-income ratio or your proposed housing budget.

For the first method, you’ll need your gross monthly income and monthly debts; for the second, you’ll need your desired monthly payment amount. Both methods will require your down payment amount, state, credit rating, and home loan type.

Once you’ve input all the information according to the method you chose, our calculator will let you know the maximum amount you can pay for a house, as well as your estimated monthly payment.

Understand the 28/36 rule

Lenders may determine your ability to afford a new home by using the 28/36 rule. This rule states that:

• Housing expenses should be no more than 28% of your total pre-tax income. This includes your monthly principal and mortgage interest rate, home insurance, annual property taxes, and private mortgage insurance payments (PMI).

• Total debt should not exceed 36% of your total pre-tax income. This includes the housing expenses mentioned above as well as credit cards, car loans, personal loans, and student loans, so long as these monthly debt payments are expected to continue for 10 months or more. This does not include other monthly expenses such as groceries, gas or your current rent payments.

In concrete numbers, the 28/36 rule means that a borrower who makes $5,000 a month should not spend more than $1,400 on housing costs every month.

If you’re a renter making $5,000 a month, it’s a good rule of thumb to spend a maximum of $1,400 on rent. However, for a homeowner making the same amount, $1,400 should cover your monthly mortgage payment, as well as homeowners insurance premiums and property taxes.

Check your credit score

It’s important that you request your credit report before you start the application process and find out your credit score.

Your credit score is a three-digit summary of your creditworthiness. Borrowers with high credit scores will typically be offered the lowest interest rates, while those with low scores will be offered the most expensive rates.

You can get a free credit report once per year from each of the three major credit bureaus. You may also access your credit report for free under certain conditions, for example, if you’re the victim of identity theft.

Additionally, thanks to the CARE Act, you can now access free weekly reports from the three major credit bureaus, at least until April 2022.

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A low credit score can negatively impact your mortgage application and interest rate.

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Calculate your debt-to-income ratio

The Debt-to-Income Ratio, or DTI, compares how much you owe to how much you earn, specifically your monthly debt versus your monthly pre-tax household income. It’s an important metric that lenders use to determine how much you can borrow — or if you can borrow at all.

Your DTI is calculated using debt such as credit card payments, car loans, student and other loans, along with housing expenses that would be added if you’re approved for the mortgage. It doesn't include other monthly expenses such as groceries, gas or your current rent payments.

A high DTI indicates that your debt is high relative to your income and vice versa. The higher your DTI, the harder it will be to get a mortgage. In fact, many lenders won’t even consider applicants with a DTI higher than 43 percent.

Lenders prefer borrowers with a DTI of 36 percent or less, and will offer them better interest rates on their mortgage. To calculate your DTI, use our debt-to-income ratio calculator.

Make a down payment

With the exception of those who qualify for VA loan or a 0% down payment mortgage program, most buyers will have to give a down payment on their potential home. Conventional loans typically require a minimum down payment of 5 percent — however, it could be as little as 3 percent if you have a low DTI ratio, high credit score and meet other requirements.

For FHA loans, the minimum is 3.5 percent.

Ideally, buyers should provide a 20% down payment on their homes. This could:

1. Lower your loan-to-value ratio
2. Reduce your monthly payments
3. Make it more likely to earn a lower interest rate
4. Buy you enough home equity to bypass private mortgage insurance

If you don’t have enough money for a 20% down payment, there is the option of refinancing later on. This can get you a better rate if market conditions are favorable.

If you want to learn more about refinancing, check out our best mortgage refinance lenders page for more information. And, to find out what your future mortgage rate would be after refinancing, use our mortgage refinance calculator.

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Ways to improve your house affordability

There are several options to consider if you are struggling to afford the home you have your eyes on. Some methods must be undertaken over time, whereas others will immediately impact your mortgage application.

Lower your DTI

DTI is one of the most important factors that lenders consider when looking at borrowers. Lowering your DTI by paying off as much debt as possible is a good option if your DTI is too high to get pre-qualified for a reasonable interest rate (or to qualify at all).

An optimal DTI is 36% or below, including possible housing costs, but excluding current rent payments, if any. If your monthly income is, for example, $5,000, then you shouldn’t owe more than $1,800 per month.

If your current debt is around $600 a month, your housing expenses can be $1,200. Also, if you already calculated all expenses on a house and get a certain number, say, $1,450, you should try and cut down your $600 monthly payments by $250 for a better chance at a loan.

Raise your credit score

There are several ways to improve your credit score. First, it’s important to check your credit report from all three bureaus — Experian, TransUnion and Equifax — for inaccuracies. If there are mistakes in your credit history, you can file a dispute with the credit agencies. They are legally required to address any inaccuracies promptly.

If the information being reported is accurate, make sure to resolve any collections accounts, pay your outstanding debt on time every month and, if possible, reduce your overall credit card debt. The higher your credit score, the lower your interest rate.

Consider applying to federal loans

The type of mortgage you’re requesting will help determine a lender’s flexibility in evaluating your loan application. Loans insured by the federal government — such as FHA loans, VA loans and USDA loans — all have certain benefits that may help you afford the home you want.

FHA loans

FHA loans are insured by the Federal Housing Administration. This means that banks get paid even if you default on your mortgage, and so are likely to be more flexible with their credit and down payment requirements. Note that, in order to qualify for an FHA loan, the borrower must intend to use the house as a primary residence and live in it within two months after closing.

VA loans

Borrowers who have served or have certain military connections may qualify for a VA loan. VA loans are more lenient than conventional and even than FHA loans. They are backed by the Department of Veterans Affairs and typically don’t require a down payment.

Qualifications vary depending on the period and amount of time you served. However, there are many ways to qualify whether you’re a veteran, active duty service member, reservist or member of the National Guard. There are also opportunities for members who were discharged.

To read more about the qualifications and process for getting a Certificate of Eligibility, visit the U.S. Department of Veteran Affairs.

And if you’d like to explore your VA loan options, visit our best VA loans page.

USDA loans

USDA loans are backed by the U.S. Department of Agriculture and offer certain benefits that conventional loans don’t.

They’re designed to help finance homes in eligible rural areas. The desired property must fall within specific geographical areas, generally outside the limits of major metropolitan centers. It must also be a primary residence with a relatively low cost.

If you are eligible, USDA loans have many benefits, including allowing you to build, rehabilitate, improve or relocate a dwelling as your primary residence to your new location.

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Related articles on home affordability

• As home prices skyrocket, trading in your four-bedroom for that little cottage by the beach might not be a lot harder. Read more about these changes here: For Retirees, Downsizing to a Smaller Home Isn’t the Cash Grab It Once Was.

• Mortgage rates are an important factor when determining your home affordability. Unfortunately for most homebuyers, these rates keep on climbing. Read more in detail here: Rising Mortgages Mean Homebuyers Get Far Less for Their Money.

• Home availability has proven to be an issue for homebuyers across the country as the low inventory also drives prices up. However, there might be some good news ahead, read Finally, More Houses Are for Sale — But the Supply Crisis Is Far From Over.

• Due to a hugely competitive market and high prices, many Millennials and Gen Zers think this isn’t the right time to purchase a home. Read more about the survey at: The Wild Housing Market Is Scaring Young People Away From Buying Houses.

Home Affordability FAQ

How much house can I afford based on my salary?

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Your salary, or gross monthly income, is one of the factors that lenders use to establish how much house you can afford. Together with your DTI, down payment, and credit rating, it's one of the most important things to consider when shopping for a new home. To determine just how much you can afford based on your salary, be sure to use our home affordability calculator.

What salary do you need to buy a 400k house?

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How much income you need to buy a house in a specific price range may vary widely based on the type of loan, location, loan term, and other factors. As an example, with a 3.5% interest rate from an FHA loan and a down payment of $79,400 (20%), you would need to earn approximately $60,000 per year to afford a $400,000 house.

How much house can I afford on a 70,000 salary?

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If you have no outstanding debt, a 20% down payment and a 3.5% interest rate from an FHA loan, you could be able to afford up to $508,000. However, bear in mind that this calculation will only apply to a small segment of the population — most people will have some kind of debt, be it from a car loan, credit cards, or their student loan payments.

How can I buy a house if my affordability is low?

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Thanks to FHA, VA, and USDA loans, those struggling with home affordability still have a chance to buy a house. These types of loans have certain benefits that make them more accessible to certain sectors of the population. However, not everyone qualifies for these home loans, as borrowers must meet certain requirements.

Why is house affordability calculated before taxes?

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When calculating house affordability, lenders want a precise picture of your spending ability. Since everybody's tax deductions are different, and can change after a big purchase such as a house, gross income provides a more consistent baseline when evaluating a buyer's finances.

Do you include all expenses when calculating house affordability?

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When companies calculate your affordability, they take into account the debt on your credit report, such as credit cards, car loans and student loans. While they don't take into account your day-to-day expenses, you should definitely consider how much you're paying for utilities, groceries, and savings when thinking of how large a mortgage you can afford.

Summary of Money’s guide to home affordability

How much house you can afford depends mainly on two factors: your eligibility for a mortgage loan and your actual budget when it comes to paying a monthly bill, along with taxes and insurance. Remember these steps when you’re getting ready to make your home purchase:

• Calculate your monthly debt and compare it to your gross income to get an idea of your DTI.

• Take into account other monthly expenses such as utilities and groceries.

• Save up for a down payment.

• Consider all your loan options, such as FHA and VA loans.

• Use a mortgage calculator to avoid any surprises.