How Much House Can I Afford in 2021?CASAPLORERTrusted & Transparent
Our home affordability calculator determines how much home you can afford and the monthly mortgage payment that will be required. The debt-to-income (DTI) ratio plays a key role in our home affordability calculator because a DTI ratio of 36% serves as the benchmark for home affordability. Certain inputs are required such as your annual household income and total monthly debt expenses.
Maximum Monthly Payment
Monthly Payment Breakdown:
Principal & Interest
Home Owners Insurance
How does the home affordability calculator work?
Our home affordability calculator determines the value of the home and the monthly mortgage payment you can afford based on your debt-to-income (DTI) ratio. It first calculates your DTI ratio using the total monthly income and debt payment information provided. The suggested DTI ratio for homeowners to maintain is 36% which means that your monthly debt and housing payments should account for no more than 36% of your monthly income. To find out your maximum mortgage payments, we subtract your monthly debt payments from 36% of your monthly income.
For example, if your monthly income is $5,000 and monthly debt expenses are $750, your current DTI ratio is 15% ($750/$5,000). Your maximum total payments with a DTI ratio of 36% is $1,800. Hence, you have $1,050 ($1,800 - $750) available for your monthly mortgage payment. Once the monthly mortgage payment is calculated, our home affordability calculator determines the maximum home price you could afford in your area.
How much mortgage can I afford?
Mortgages are one of the largest monthly expenses for most homeowners, which is why it is crucial to ensure that it is within budget. Our calculator requires basic inputs to determine your current debt payments and how much of your income is actually available for mortgage payments. It is also important to consider the amount of savings you have for the down payment and closing costs of the home. Our calculator lets you input the minimum down payment that you can pay and the rest of the home value is financed into the mortgage. Once these factors are taken into consideration, it is also wise to save some funds in the event of an unforeseen expense. A rule of thumb to prepare for unexpected expenses is to have three months of monthly debt and housing payments saved, just in case something goes wrong.
Factors Affecting How Much House I Can Afford
Credit score is a very important criterion in determining the mortgage rate you receive on your loan. In general, the minimum requirement for most conventional loans is 620. However, lenders prefer 720 or higher for lower rates. If these credit score requirements are too high for you then you should consider other loan options such as FHA loans for low-income earners, VA Loans for veterans, and USDA loans for homes in rural areas.
Larger down payments result in lower mortgage rates for the simple reason that there is less risk involved. The rationale behind this is that a larger down payment means greater equity in the home and smaller losses for the lender if you default on your monthly mortgage payments. Your down payment is linked to your loan-to-value (LTV) ratio, which is a financial risk measurement tool used by lenders. An LTV ratio of 80% or lower is preferred by lenders. The minimum down payment you are willing to put in will impact the mortgage rate you receive and whether you will have to pay for private mortgage insurance (PMI). PMI is required by lenders if your down payment is less than 20% of the home’s value. If a large down payment is too difficult for you then consider first-time homebuyer programs or federal assistance home loans.
Debt-To-Income (DTI) Ratio
The DTI ratio is the most important financial risk measuring tool used by lenders to determine mortgage eligibility. The DTI ratio is used by our home affordability calculator to determine how much of your monthly income can be spent on mortgage payments after your current monthly debt expenses have been paid. If you have a lower DTI ratio to begin with, such as if you have fewer debt obligations, then you have a greater capacity to pay for your mortgage payments and can afford a larger home.
It is very easy to calculate the DTI ratio: it is the fraction of your gross total monthly income that is spent on debt and interest repayments. For example, if your monthly income is $10,000 and monthly debt expenses are $3,000, then your DTI ratio is 30% ($3,000/$10,000). The following table shows what the various DTI ratio values mean:
|Debt-to-Income (DTI) Ratio||Result||Home Affordability|
|DTI < 20%||Excellent DTI ratio||You can afford higher monthly mortgage payments|
|20% < DTI < 36%||Good DTI Ratio||You can afford your mortgage payment comfortably|
|36% < DTI < 42%||Average DTI Ratio||You can afford your mortgage payments|
|42% < DTI < 50%||Bad DTI Ratio||You might find it difficult to pay for your mortgage payments|
|DTI > 50%||Poor DTI Ratio||You should improve your DTI ratio before trying to buy a home|
Our calculator bases the mortgage payment on a DTI ratio of 36%, however, you may be comfortable to have a higher or lower DTI ratio and can choose to change this criterion by using the sliding scale. The highest possible DTI ratio allowed for home loans is 50%, following which lenders will view you as too risky as you have a higher chance of defaulting on one or more of your debt obligations.
What is the 28%/36% debt-to-income (DTI) ratio rule?
The 28%/36% rule is a guide for potential and existing homeowners stating that your total monthly housing costs should not exceed 28% of your monthly pre-tax income and all your monthly debts (including housing) should not exceed 36% of your monthly pre-tax income. The monthly housing expenses include mortgage payments, PMI, taxes, fees, and additional debt includes credit cards, student loans, auto loans, and other monthly debt payments.
This rule is just a suggestive guide for homeowners; you can choose to have a higher or a lower DTI ratio. If you are comfortable with a higher DTI ratio, you can afford a larger home on your salary as you will have more debt. Whereas, if you are risk-averse and want a lower DTI ratio, you will have to purchase a smaller home or lower your other debt payments.
The table above shows how the 28%/36% rule works, for example, if your monthly income is $5,000, your monthly mortgage payment should be no more than $1,400 ($5,000*28%) and your total monthly debt should be no more than $1,800 ($5,000*36%) which means other monthly debt is $400 ($1,800 - $1,400). As your income rises, a larger monthly mortgage payment can be made, and you can afford a larger home.
|Gross Monthly Income||Housing Debt - 28%||Debt Payments||Total Debt Limit – 36%|
Mortgage Programs and Home Affordability
How much house can I afford with an FHA loan?
FHA loans are insured by the Federal Housing Agency and are aimed at individuals with low-income and little to no savings. FHA home loans have a minimum down payment of only 3.5% if you have a credit score higher than 580. If your credit score is higher than 500 but below 580 then a minimum down payment of 10% is required. All FHA loans have loan limits loan limits and require FHA mortgage insurance premium (MIP) to reduce the risk for the lender. If you have a poor credit score or a smaller down payment, an FHA loan can help you afford a larger loan than a conventional loan. You can use our FHA loan calculator to determine your monthly mortgage payment using a 3.5% down payment and FHA rates.
How much house can I afford with a VA loan?
VA Loans are backed by the Veteran’s Administration and are targeted at eligible veterans and their spouses. VA home loans do not have a minimum down payment or credit score requirement, making them an affordable option for veterans. As a result of these benefits you can afford a larger home with a VA loan as compared to a conventional mortgage; however, you have to meet the strict eligibility requirements for this program. Most VA loans require an additional upfront payment known as the VA funding fee which is in the range of 0% - 2.3%. You can use our VA loan calculator to determine your monthly mortgage payment with the VA funding fee and current VA rates.
How much house can I afford with a USDA loan?
USDA Loans are insured by the United States Department of Agriculture and are targeted towards individuals in rural areas who are within the income limits. USDA loans do not have a minimum down payment or credit score requirement, however, there are strict eligibility requirements for this type of loan. The home you can afford with a USDA loan will be larger than a conventional mortgage as this type of loan has fewer loan requirements and eligibility criteria as long as you meet the USDA requirements. The USDA eligibility map and calculator can be used to determine if you are eligible for this type of loan.
How much house can I afford with a Jumbo loan?
Jumbo loans are mortgages that do not fit the conforming loan limits set by the Federal Housing Finance Association (FHFA). These mortgages are too large to be insured by agencies such as Fannie Mae and Freddie Mac. Therefore, this type of home loan has a larger minimum down payment and higher credit score requirements. If you have a high income and low DTI ratio you can afford a larger home with a jumbo loan as compared to a traditional mortgage.