Calculate how much house you can afford based on your income, debts, and down payment
Credit cards, car loans, student loans, etc.
Annual property tax as % of home value
Mortgage affordability determines how much house you can realistically purchase based on your financial situation. Lenders use specific ratios and guidelines to assess your ability to repay a mortgage loan. Understanding these factors helps you set realistic expectations and avoid overextending yourself financially.
The two primary factors lenders consider are your gross monthly income and your existing debt obligations. These are used to calculate debt-to-income (DTI) ratios, which are the key metrics in determining how much you can borrow.
The front-end ratio compares your proposed monthly housing expenses (mortgage payment, property taxes, insurance, and HOA fees) to your gross monthly income. Most lenders prefer this ratio to be 28% or lower, though some programs allow up to 31%.
The back-end ratio includes all your monthly debt obligations (housing expenses plus car loans, credit cards, student loans, and other debts) compared to your gross monthly income. Conventional loans typically require this ratio to be 36% or lower, though some programs allow up to 43% or even 50% with strong compensating factors.
Your down payment significantly affects affordability in multiple ways. A larger down payment reduces your loan amount, lowering monthly payments and potentially eliminating private mortgage insurance (PMI) requirements if you put down 20% or more.
Common down payment percentages include 3% (FHA and some conventional loans), 5% (conventional loans), 10% (conventional loans), and 20% (conventional loans without PMI). VA and USDA loans may offer 0% down payment options for qualified buyers.
Property taxes vary significantly by location, typically ranging from 0.5% to 2.5% of the home's value annually. These are usually included in your monthly mortgage payment through an escrow account.
Required by all lenders, homeowners insurance typically costs $800 to $2,000 annually, depending on location, home value, and coverage level. Flood or earthquake insurance may be additional requirements in certain areas.
If purchasing in a community with a homeowners association, monthly fees can range from $100 to $500 or more. These fees are included in your debt-to-income ratio calculations and affect affordability.
Different loan programs have varying DTI requirements and down payment options. Conventional loans typically require 3-20% down and DTI ratios up to 43%. FHA loans allow 3.5% down with DTI ratios up to 43-50%. VA loans offer 0% down for eligible veterans with DTI ratios up to 41%. USDA loans provide 0% down for rural properties with DTI ratios up to 41%.
Each program has specific credit score requirements, with conventional loans typically requiring 620+, FHA loans accepting 580+, and VA/USDA loans varying by lender. Your credit score affects not only approval but also your interest rate, which significantly impacts affordability.
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