What budget house can I afford?

Introduction:

A house is one of the biggest purchases you can make, so ‘what budget house can I afford?’ is to  figuring out how much you can afford is a key step in the home-buying process. You’ll need to start by weighing how much money you have coming in — your monthly earnings from your job, investments and any other streams of income — versus how much you have going out to cover costs like student loans, credit card balances and car payments.

How much mortgage payment can I afford?

As you think about your mortgage payments, it’s important to understand the difference between what you can spend versus what you can spend while still living comfortably and limiting your financial stress. For example, let’s say that you could technically afford to spend $4,000 each month on a mortgage payment. If you only have $500 remaining after covering your other expenses, you’re likely stretching yourself too thin.

To calculate how much house you can afford, we take into account a few primary items, such as your household income, monthly debts (for example, car loan and student loan payments) and the amount of savings available for a down payment. As a home buyer, you’ll want to have a certain level of comfort in understanding your monthly mortgage payments.

While your household income and regular monthly debts may be relatively stable, unexpected expenses and unplanned spending can impact your savings.

Understand the 28/36 rule

Lenders may determine your ability to afford a new home by using the 28/36 rule. This rule states that:

• Housing expenses should be no more than 28% of your total pre-tax income. This includes your monthly principal and mortgage interest rate, home insurance, annual property taxes, and private mortgage insurance payments (PMI).
• Total debt should not exceed 36% of your total pre-tax income. This includes the housing expenses mentioned above as well as credit cards, car loans, personal loans, and student loans, so long as these monthly debt payments are expected to continue for 10 months or more. This does not include other monthly expenses such as groceries, gas or your current rent payments.

In concrete numbers, the 28/36 rule means that a borrower who makes $5,000 a month should not spend more than $1,400 on housing costs every month.

If you’re a renter making $5,000 a month, it’s a good rule of thumb to spend a maximum of $1,400 on rent. However, for a homeowner making the same amount, $1,400 should cover your monthly mortgage payment, as well as homeowners  insurance premiums and property taxes.

What factors help determine” What budget house can I afford?”

Key factors in calculating affordability are 1) your monthly income; 2) cash reserves to cover your down payment and closing costs; 3) your monthly expenses; 4) your credit profile.

• Income. Money that you receive on a regular basis, such as your salary or income from investments. Your income helps establish a baseline for what you can afford to pay every month.
• Cash reserves. This is the amount of money you have available to make a down payment and cover closing costs. You can use your savings, investments or other sources.
• Debt and expenses. Monthly obligations you may have, such as credit cards, car payments, student loans, groceries, utilities, insurance, etc.
• Credit profile. Your credit score and the amount of debt you owe influence a lender’s view of you as a borrower. Those factors will help determine how much money you can borrow and the mortgage interest rate you’ll earn.

How much house can I afford on my salary?

Want a quick way to determine how much house you can afford on a $40,000 household income? $60,000? $100,000 or more? Use our mortgage income calculator to examine different scenarios.

By inputting a home price, the down payment you expect to make and an assumed mortgage rate, you can see how much monthly or annual income you would need — and even how much a lender might qualify you to borrow.

That calculator also answers the question from another angle: What salary do I need to buy a $300,000 house? Or a $400,000 house?

It’s another way to get comfortable with the home buying power you may already have, or want to gain.

How much house can I afford with an FHA loan?

To calculate how much house you can afford, we’ve made the assumption that with at least a 20% down payment, you might be best served with a conventional loan. However, if you are considering a smaller down payment, down to a minimum of 3.5%, you might apply for an FHA loan.

Loans backed by the FHA can also have more relaxed qualifying standards — something to consider if you have a lower credit score. If you want to explore an FHA loan further, use our FHA mortgage calculator for more details.

Conventional loans can come with down payments as low as 3%, although qualifying is a bit tougher than with FHA loans.

Frequently Asked Questions

How much house can I afford?

While you may have heard of using the 28/36 rule to calculate affordability, the correct DTI ratio that lenders will use to assess how much house you can afford is 36/43. This ratio says that your monthly mortgage costs (which includes property taxes and home owner’s insurance) should be no more than 36% of your gross monthly income, and your total monthly debt (including your anticipated monthly mortgage payment and other debts such as car or student loan payments) should be no more than 43% of your pre-tax income.

For example, if you make $3,000 a month ($36,000 a year), you can afford a mortgage with a monthly payment no higher than $1,080 ($3,000 x 0.36). Your total household expense should not exceed $1,290 a month ($3,000 x 0.43).

When should I start saving for a house?

As soon as you’re debt-free with a full emergency fund of 3–6 months of your typical expenses, you’re ready to start saving for a house!

How can I save for a house quickly?

If you want to save for a house fast, you need to be debt-free and have an emergency fund of 3–6 months of expenses saved. With your income freed up from debt payments and an emergency fund to protect you from life’s unexpected surprises, you can save for a house much faster. Here are some other ideas to help you save money fast.

Conclusion

In conclusion, achieving a state where budget revenue exceeds expenditures is a commendable financial achievement. It provides the means for debt reduction, infrastructure development, and economic stability. However, it is essential to approach budgeting with a balanced perspective, considering long-term societal needs and potential economic fluctuations. By doing so, governments and organizations can navigate financial challenges while fostering sustainable growth.