Determining how much house you can afford involves more than just calculating your monthly mortgage payment. Here's a breakdown to guide your decision:

Key Insights

• Mortgage Payment: Should not exceed 28% of your gross monthly income.
• Debt-to-Income Ratio: Lenders prefer a DTI ratio of 36% or lower for loan approval.
• Additional Expenses: Factor in property taxes, insurance, maintenance, and HOA fees.

Rules to Estimate Affordability

• One-Third Principle: Your mortgage should be no more than three times your annual income.

• Example: $100,000 annual income = $300,000 maximum mortgage.

• 28/36 Rule:

• Mortgage payment \u2264 28% of gross monthly income.
• Total debt payments (mortgage, car loans, credit cards, etc.) \u2264 36% of gross monthly income.

Example: If you earn $7,000/month:
- Max mortgage = $1,960 (28%).
- Total debt = $2,520 (36%).

Factors Affecting Your Mortgage Limit

• Credit Score:
• A FICO score of 580 - 620+ is typically required for mortgages.

• Higher scores = better interest rates.

• Income and DTI:

• The lower your current debt, the more you can allocate to your mortgage.

• Down Payment:

• 20% down avoids private mortgage insurance (PMI).

• Higher down payments lead to lower monthly payments.

• Interest Rates and Points:

• Lower interest rates reduce monthly payments.

• Consider paying discount points for a better rate.

• Additional Costs:

• Closing costs: 2-5% of home price.
• Insurance: Average annual cost is $1,249.

Mortgage Affordability Calculator

Use online calculators to determine affordability by adjusting these inputs:
1. Annual income.
2. Down payment amount.
3. Interest rate.
4. Desired loan term (15 - 30 years).
5. Property taxes and insurance costs in your area.

Tips for First-Time Buyers

• Don't stretch your budget to match a lender's approval. Aim for comfort, not just maximum borrowing.
• Plan for unexpected costs like repairs and emergencies.
• Compare offers from multiple lenders to find the best rate and terms.

Bottom Line

A house is a major investment, so ensure your mortgage fits your budget and long-term financial goals. Use guidelines like the 28/36 rule, account for all expenses, and choose a home that balances affordability with your lifestyle aspirations.

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