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What Kind of Home Can You Afford to Buy?

Key Takeaways

  • The most important factors are your budget for a monthly mortgage payment and what amount of mortgage you qualify for.
  • Experts recommend that your mortgage payment be no more than 28% of your gross monthly income.
  • Mortgage lenders will evaluate your debt-to-income ratio, credit score, employment history, and other factors.

Are you house hunting? If so, this is an exciting time! You’re on the path toward laying down a foundation for your future.

While you’re searching, you’ll be faced with the age-old question: What can I afford? To answer it, you’ll need to find out what monthly mortgage payment will fit into your budget and how much you may be able to borrow.

How much can you comfortably spend?

Take a hard look at your budget. How much of a mortgage payment can you fit alongside your other expenses?

Many experts recommend that your mortgage payment (including home insurance, property taxes, and any mortgage insurance) be 28% or less of your gross monthly income. For example, if a couple’s annual household income is $120,000, their gross monthly income would be $10,000. Therefore they’d want to keep their monthly mortgage payment to $2,800 or less.

Now, that doesn’t mean you should spend up to that 28% mark; evaluate your other expenses and anything you can cut out of your budget to find a number that works for you. You might even buy a less expensive house in an effort to live below your means, and then use the excess funds elsewhere.

Remember, you may pay more for utilities, maintenance, and yard care than you did at your previous residence, especially if you’re moving to a larger house or from an apartment to a house.

How much can you borrow?

This answer is based on mortgage qualification requirements, which vary by lender and type of mortgage. Generally speaking, the factors below play a major role in determining whether you qualify for a loan, how much you can borrow, and at what interest rate — which affects both your monthly payment and how much home you can afford.

  • Debt-to-income (DTI) ratio: DTI equals your cumulative monthly debt payments — such as student loans, auto loans, and credit cards — divided by your total household income before taxes. Lenders may accept as much as 43% DTI, but below 36% is ideal.
  • Credit history and credit score: A higher credit score represents less risk to the lender, making it easier for you to qualify for a mortgage. Credit scores less than 670 are not as ideal, while scores 740 and above are better.
  • Employment history: Lenders want stability and prefer to see steady employment for at least the most recent two years — and an explanation for any gaps in your work history.
  • Savings: You should have sufficient liquid assets to cover the upfront costs of purchasing a home, plus a buffer equal to at least three months of mortgage payments (more may be required depending on the loan program). This is a safeguard in case you hit a financial bump after your purchase.
  • Down payment: A 20% down payment isn’t always required, but it can make it easier to get qualified. Plus, it means you can borrow less and avoid paying mortgage insurance (which protects the lender in case the borrower defaults). Therefore, the larger the down payment, the lower your monthly mortgage payment.

You can ask a lender for a prequalification before you shop or apply for a mortgage to determine how much you may be able to borrow.

The bottom line

By figuring out how much home you can afford, you’ll set yourself up for a more successful house hunt. And you’ll lay down the foundation for a financially comfortable and confident future in your new home.

More information

If you have questions about home affordability or mortgage qualification, learn how a Citizens Bank Loan Officer can help you with your home-buying experience.