How much house can I afford?
Home affordability is about more than just how much you can borrow. You'll also need to consider the up-front costs of buying a house, as well as the ongoing expenses of home ownership. Use our Home Affordability Calculator to start thinking through your options.
Your income, credit history, the size of your down payment, and your employment and residence history are all factors in how much you can borrow. Depending on circumstances, the amount you can borrow may exceed the amount you can comfortably afford - so it pays to borrow cautiously.
Some costs associated with buying a home show up before you start making regular mortgage payments. These include:
- Mortgage application fees
- Earnest money
- Down payment
- Closing costs
Application fees include "origination" (or "service") fees, which can be flat fees, or can range from 1 to 2% of total purchase price. There are also appraisal, underwriting and credit reporting fees. These can sometimes be worked into the closing costs.
This is an initial deposit to be paid to the seller if your offer is accepted, to put weight behind your intention to buy. If yours is among multiple bids on a home, the earnest money you put down (also known as a "good faith deposit") may influence the seller's decision-making in your favor.
You can often get the best mortgage rates by paying a higher mortgage down payment. Down payments can range anywhere from 0% to 20% or more of the total cost of the home. 15% to 20% is ideal. Paying mortgage points up front can also help lower your payments and interest.
Final closing costs typically range from 2% to 4% of
the total loan amount. Sometimes closing costs can be rolled into the mortgage loan amount, which means you can pay them off as you pay down your mortgage. Closing costs can include:
- Mortgage application fees (see above)
- Mortgage points
- Attorney's fees
- Inspections and surveys
- Title insurance and title search
- Escrow deposit
- City recording fees
Don't be intimidated by the list of closing costs. They are all paid at once and many can be estimated by the lender up front.
Owning a home requires financial commitment beyond your monthly mortgage payment, including:
- Mortgage insurance (required for most mortgages with down payments less than 20%)
- Home insurance
- Property taxes
Make sure you're taking all these costs into account when asking yourself, "How much home can I afford?" It's important to be informed on all the costs involved and how much you can afford prior to committing to a home mortgage.
If you're still saving for your first home, here are some additional tips that can help.
- Saving for a higher down payment can mean a lower APR and payments
- Maintaining a regular and reliable income improves your standing with lenders
- Combining stated income with a partner or spouse can be an advantage
- Consistently paying your bills on time contributes to a good credit score
- Limiting your monthly debt also helps improve your credit score
- Generally, you'll want mortgage payments alone to be less than 28% of your income
Building sound finances and a rock-solid credit rating before you buy will help you afford more home. It can also help you compete better in the market for the house you want, make it easier to handle the up-front costs of buying a home, and make home ownership more fun and easier to manage.
Category: Bank loan