The amount of mortgage loan you can qualify for is determined by the lender’s assessment of your debt capacity. This assessment will ultimately dictate how much house you’re able to afford. 

However, just because you’re pre-approved for a certain loan amount, it doesn’t mean you should buy a house that costs that much. Instead, you’ll want to carefully evaluate your financial situation and determine a solid budget.

Read on to discover how to calculate how much house you can afford, explore other factors that impact home affordability, and gain a better understanding of whether buying a house is the right decision for you as you start your homebuying journey.

the 28/36 rule and how it relates to calculating home affordability

When it comes to determining how much house you can afford, lenders calculate your debt-to-income ratio (DTI). Your debt-to-income ratio is calculated by dividing your monthly debt payments by your monthly gross income. It serves as a crucial factor in evaluating how much additional debt you can take on.

The 28/36 rule is a widely used guideline that relates to calculating home affordability based on your DTI. This rule suggests that it’s best to keep your DTI within a range that’s defined by these two numbers.

According to the 28/36 rule, a household should allocate no more than 28% of its gross monthly income to cover total housing expenses, while the limit for total debt service is set at 36%. While different lenders use varying criteria for approving credit applications, the 28/36 rule provides a useful baseline for assessing your financial situation. Let’s look at an example.

Let’s say your monthly income is $5,000. According to the 28/36 rule, your monthly mortgage payment should not exceed $1,400 (28% of your gross monthly income), and your total monthly debt payments should stay below $1,800 (36% of your gross monthly income).

Remember, it’s important to keep your monthly mortgage payment, including principal, interest, taxes, and insurance, within 28% of your gross monthly income, and your total monthly debt, including mortgage payments, car loans, and student debts, within 36% of your total monthly income.

Other Factors That Determine How Much Home You Can Afford

While your DTI and housing expense ratios are important factors in determining home affordability, there are other factors to consider that can affect your monthly mortgage payment. Here are several factors to keep in mind before embarking on your search for a new home:

• Mortgage Term: The mortgage term refers to the length of time you have to repay the borrowed amount. Common terms include 15 and 30 years, although other options are available. Your mortgage term directly impacts your monthly mortgage payments. The longer the loan term, the smaller your monthly payments.
• Mortgage Interest Rate: The mortgage rate refers to the interest rate applied to your mortgage. It can be fixed or adjustable and is determined by your lender. Your credit score, down payment, and other factors can influence the rate. Your interest rate has a direct impact on your monthly payment, thus affecting affordability.
• Monthly Budget: In addition to considering your DTI and existing debt, it’s crucial to evaluate your overall budget. Assess how a monthly mortgage payment aligns with your financial situation. A thorough understanding of your budget, savings, and assets is essential, as savings may be required for a down payment.
• Cash Reserves: Cash reserves refers to the number of monthly mortgage payments you could cover from your savings in case of job loss or other events impacting your ability to make payments. While reserve requirements vary among loan programs, it is generally advisable to have at least two months’ worth of mortgage payments in your savings account.
• Down Payment: Contrary to popular belief, you don’t need 20% down to purchase a home. You can get a conventional loan backed by Fannie Mae or Freddie Mac with as little as 3% down. However, there are advantages to a higher down payment. It may result in lower interest rates and eliminate the need for mortgage insurance, which can significantly decrease your monthly payment.
• Extra Costs: In addition to the down payment, you’ll also need to consider closing costs, property taxes, and homeowners insurance. These additional costs can substantially increase the total amount due at the time of closing.

Understanding How Much Mortgage You Can Afford

Ultimately, determining how much home you can afford depends on your financial situation and preferences. To simplify the process, use our free mortgage and amortization calculators.

Our user-friendly mortgage calculators simplify the process by allowing you to adjust variables and see how they affect your monthly payments. They automate calculations, letting you compare different loan types like 30-year fixed-rate or 15-year fixed-rate mortgages.

Whether you’re buying a new home or refinancing, using a mortgage calculator can help you compare rates, plan your budget, and understand mortgages better. Don’t miss out on the benefits of our free home loan calculators.

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