Buying a home goes beyond the listing price. To understand what you can actually afford, you need to look at the whole picture.
In this guide, we’ll break down the actual cost of home ownership (beyond a mortgage), ongoing expenses, and how your debt-to-income ratio (DTI) plays a part in what makes a home affordable.
Keep reading to get a clear framework for knowing how much you can realistically pay for your next house.
Two Quick Ways to Calculate How Much You Can Afford
Breaking down your full debt-to-income ratio is an in-depth process, but you can get in the ballpark with one of two easy calculations.
Method #1: The 28/36 Rule
This basic rule states that you should spend no more than 28% of your gross monthly income on housing, and your total debt shouldn’t exceed 36%. If you make $7,000 per month, here’s how the 28/36 rule breaks down:
- 28% of $7,000 = $1,960 → your maximum monthly housing expenses
- 36% of $7,000 = $2,520 – housing = $560 → room for other debts
Method #2: The Income Multiple Method
It’s also possible to calculate a home’s affordability by multiplying your annual income by 2.5 or 3 to get a rough figure. For example, according to the Income Multiple Method, if you make $80,000 per year, you could afford a $240,000 home.
Important note: These calculations will only get you close. Other factors, such as your credit score, savings, and current debt level, can also affect your actual number. If you have low credit or high monthly debt, you’ll need to allocate a smaller portion of your budget to housing.
Want to know how much you can afford without the extra math?
Try out our home affordability calculator to get an instant estimate of homes within your budget, including your monthly costs. To get your number, all you need is your:
- Annual income and monthly debts
- Debt-to-income ratio
- Down payment
- Desired interest rate
- Potential insurance costs and property taxes
For the most accurate number, speak with a PHH home loan officer to learn how much you can be pre-approved for.
As your servicer, we can use the information about your existing loan to help you compare options and get a binding quote faster. Plus, we’ll always match or beat any other rate you’ll find elsewhere.
Core Affordability Factors When Looking for a House
Your monthly mortgage payment can change depending on how risky lenders think it will be to loan you money. Learning more about the factors they consider can help you better understand what affects your monthly payment.
Income & Debt-to-Income Ratio (DTI): Your income sets the ceiling for your mortgage, but how much you carry in debt compared to your income determines your borrowing power. A lower DTI means more borrowing power.
Credit Score & Interest Rate: The more reliable you are at paying off debts, the higher your credit score is. And the higher your credit score, the lower your interest rate. Just a 1% difference in a mortgage can mean hundreds of dollars less in monthly costs.
Down Payment & Savings: Lenders prefer to see a decent savings account balance when calculating rates. More savings means your loan will be lower risk because you have reserves for emergencies and closing costs. Down payments also lower your monthly payments, and putting 20% down can help you avoid private mortgage insurance (PMI).
Loan Terms: The length of time it takes to pay off your loan, or loan term, also plays a significant role in determining your monthly affordability.
Accepting a shorter term, such as a 15-year mortgage, allows you to pay off your loan faster and with less interest. However, a 30-year mortgage — the most common term — drops your monthly payment in exchange for more interest.
Ongoing Expenses to Consider
As you prepare to move, it helps to think beyond your mortgage payment to how much it costs to live comfortably in your new home. Some ongoing costs you should keep in mind include:
- Property taxes: Tax rates vary by location, but the national average is around 1.1% per year.
- Homeowners' insurance: Varies by company and coverage. A safe estimate is 0.5% of your home’s value yearly.
- Maintenance and repairs: On average, homeowners spend around 1-2% of their home’s value on repairs yearly.
Depending on the down payment, homeowners are also responsible for PMI — usually around $100 per month. You’ll also be responsible for closing costs, which typically range from 2% to 5% for buyers.
If you choose to purchase in a neighborhood with a Homeowners’ Association (HOA), you will pay yearly dues to the association. They vary from neighborhood to neighborhood but can run close to $3,000 per year.
To put it in perspective, your total monthly expenses would be closer to $1,900 a month if you purchase a $240,000 home, without factoring in PMI or closing costs.
How to Get Your Real Number
Now that you understand the ballpark figures and potential costs, how can you get a more accurate idea of what you’ll spend?
Step 1: You can use our home affordability calculator to gain a clearer picture of how much you can pay for a house.
The calculator takes into account your annual income, monthly debts, down payment, interest rate, and other factors to help you understand what you can afford for a house.
Step 2: Consult with a loan officer to gain pre-approval. Working with an officer will give you a precise, lender-backed number that you can use as your budget when shopping for a house. This is the most accurate way to determine what you can afford and if the houses you’ve looked at are a good fit.
Schedule a quick call with one of our loan officers to see how much you qualify for, and take the guesswork out of shopping for a house.
Final Thoughts: How Much House Can You Actually Afford?
Before shopping for your dream home, take the time to calculate what price works for you.
Start with general rules of thumb, such as the 28/36 rule or the income multiple method. Then, factor in potential additional expenses and use a home affordability calculator to get a clearer picture of your financial situation.
For the most accurate idea of what you can spend on a house, reach out to a loan officer. Working with a professional is the only way to really determine what a mortgage company will offer you when you apply for a home loan.
And once you start looking for a home, remember that you don’t need to spend your maximum amount. Buying a house under your maximum affordability will give you more financial freedom in the long run and can help you live more comfortably.