A standard rule for lenders is that your monthly housing payment (principal, interest, taxes and insurance) should not take up more than 28 percent of your income.
However, home affordability is about more than just how much you can borrow. You'll also need to consider the following:
- Up-front costs such as down payment and application fees
- Closing costs like attorney fees and escrow deposits
- On-going expenses such as property taxes, insurance and repairs
How much mortgage can I afford to borrow?
Your income, credit history, the size of your down payment, and your employment and residence history are all factors in how much you could borrow. Depending on circumstances, the amount you could borrow may exceed the amount you can comfortably afford — so it pays to borrow cautiously.
Use our Home Affordability Calculator to start thinking through your options.
What will I need to pay up front?
Some costs associated with buying a home show up before you start making regular mortgage payments. These could include but are not limited to:
- Mortgage application fees
- Earnest money
- Down payment (paid at closing)
- Closing costs (paid at closing)
Mortgage application fees
Application fees include "origination" (or "service") and are flat fees. There are also appraisal, underwriting and credit report fee, which can sometimes be worked into the closing costs.
When purchasing a home, this is an initial deposit to be paid to the seller if your offer is in consideration, to put weight behind your intention to buy. If your purchase offer 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. Paying mortgage points up front could also help lower your payments and interest.
Closing costs typically range from 2% to 5% of the loan amount. However, they can vary depending on your lender, location and property. Closing costs can include but are not limited to:
- Mortgage application fees (see above)
- Mortgage points
- Attorney's fees
- Inspections and surveys
- Title insurance and title search
- Escrow deposit
- Recording fees (City/County/State)
Don't be intimidated by the list of closing costs. They are all paid at once and many can be estimated by the lender in advance.
Home ownership expenses
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 owners 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.
Planning and saving tips
If you're still saving for your first home, here are some additional tips that can help.
- Saving for a higher down payment could mean a lower APR and payments
- Maintaining a regular and reliable income improves your standing with lenders
- Combining stated income with a co-borrowing partner or spouse could 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
- Mortgage payments should not exceed more than 28% of your income before taxes (a standard rule for lenders)
Building sound finances and improving your credit rating before you buy will/could help you afford more home. It could 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 may make home ownership more fun and easier to manage.