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How Much House Can I Afford?

Whether you've owned a home before or this will be your first, it'll help to learn how your income and debt can impact the home you can afford. The easiest way to understand your financial health is to calculate your debt-to-income ratio — this will help you determine the maximum mortgage amount you can comfortably pay for.

You'll also want to consider things like your location, credit score and loan terms since everyone's financial situation is different. We'll show you how to calculate how much house you can afford and the steps you can take to improve your financial health in general.

How Do I Know How Much House I Can Afford?

It's possible to find a budget that works when shopping around for a home with an understanding of your monthly income and expenses. When you have a budget, you can avoid getting a mortgage that overworks your finances or a house you can't really afford yet. Use these factors when calculating what you can afford to spend on a house:

1. Income and Cash Reserves

Any income you have coming in — or set aside — could contribute to a down payment. Consider cash flow and reserves like:

  • Your salary
  • Savings accounts
  • Investments

2. Debt and Expenses

Any money you have going out to pay for bills and debt can impact how much house you can afford. Debt could include things like credit card payments, student loans, car insurance and household bills.

3. Credit History

Your credit score can also impact your eligibility for a lower mortgage interest rate. Being late on your bills and credit card payments can bring your credit score down.

Each of these factors impacts the loan you can get for your future home. Consider a potential homebuyer with a low credit score and high debt, for instance — they would be less likely to get a high loan amount than a homebuyer with low debt and a high credit score.

How Does the 28/36 Rule Impact Home Affordability?

You might've heard about the 28/36 rule — it's a standard that helps people understand where they're at in their financial lives when working with a mortgage lender. If you follow that rule, it means you should:

  • Have no more than 28% of your pre-tax gross monthly income contributing to your housing expenses.
  • Have no more than 36% of your gross income going to your total debt, like car payments and credit cards.

Mortgage lenders might use this rule as a threshold to determine approval for a home loan. If you're in the research phase of purchasing a house, it's helpful to use this standard to see if you're potentially ready to buy.

For example, suppose you bring home $6,000 a month. According to the 28/36 rule, your mortgage payment shouldn't exceed $1,680 per month, while your total debt should not exceed $2,160. If you can, go ahead and calculate your expenses and debt to see if you meet the 28/36 rule. Reserve anything left after this calculation for other necessary expenses, like buying food and contributing to savings accounts.

How Can I Maximize My Home Affordability?

Are there ways to improve mortgage affordability without increasing your income? Absolutely. There are several ways you can make your budget work for you by improving other aspects of your financial life. Here are some considerations for increasing home affordability:

  • Increase your credit score: Boosting your credit score can help you get better loan terms for your home. Keep up with credit card payments and avoid opening new accounts if you plan on applying for a mortgage soon.
  • Improve your debt-to-income ratio: Reducing your debt is a win across the board in terms of financial health, so, if you can, try to pay down your credit cards, vehicles and other debt. You'll then be able to maximize your income and present as less of a risk to lenders.
  • Decide the size of home you need: If your mortgage calculations are coming out way beyond your budget, you may need to reconsider the size of home you're looking for. Start small with a home you can comfortably afford and upsize when you're ready.
  • Consider your location: While you may have a dream location or neighborhood, the high cost of living in certain cities can make put some homes entirely out of your price range. Casting a wider net means you may find a home that fits your budget and has most of the items on your must-have list.
  • Set aside an emergency fund: While preparing a budget for your new home, you'll also want to stash away extra money. An emergency fund can save you in a myriad of scenarios.
  • Shop around for loans: Getting a home loan is a big decision, which is why you'll want to use a trusted community bank and lender for your mortgage. Be sure to inquire about what services your bank offers, such as down payment assistance, Federal Housing Administration (FHA) mortgage loans and more.

How to Use a Mortgage Calculator

Now that we've already discussed the factors you need to figure out the baseline of what you can afford, including your monthly income and debt payments, let's move on to determining your mortgage payment. Here's a payment breakdown of the primary factors you'll need to calculate your monthly payment:

  • Home price
  • Down payment
  • Loan term
  • Interest rate
  • Property taxes
  • Homeowners insurance
  • Private mortgage insurance (PMI)
  • Homeowners association (HOA) fees

As a reminder, this is an example and does not include every factor in your payments. That will be provided to you when you apply.

In some cases, you may not have HOA fees for your home or PMI payments. If these factors don't apply to you, simply calculate your mortgage payment using the key factors relevant to the home you have your eyes on. Let's expand on this with an example:

  • Say you want to buy a house for $400,000 with a 20% down payment of $80,000.
  • You get approved for a 30-year loan term at a fixed rate of 6%.
  • The property taxes on your home are $263 a month, and your homeowners insurance comes out to $66 monthly.

For this example, let's say you buy a home in a location that doesn't have a homeowners association, so you don't need to pay the fees for that. You also put down a minimum of 20% on your home, so you're not required to get PMI. With this in mind, your monthly mortgage payment should come out to about $2,398 — not including your property taxes and homeowners insurance.

Get Started With a Mortgage Application With First Commonwealth Bank

Feeling a bit lost while deciding how much home you can afford? That's perfectly normal. First Commonwealth Bank is here to guide you through the process and help you understand the financial impact and requirements of owning a home.

We know how important it is to learn how to manage, save, borrow and protect your money. Our team includes experienced bankers and financial advisors who are ready to help you feel confident in your financial life — they'll provide services and tools to meet your unique needs. Apply for a mortgage online if you're ready, or schedule an appointment with us. We'd be happy to answer your questions.