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How to budget for a house

Updated: Jan 5

By Lauren Ward


Create a realistic budget for a house by understanding everything a lender looks at to determine your maximum loan amount



Figuring out your home budget isn't a one-size-fits-all calculation. There are many different factors that influence affordability, including your income, interest rate, other debts and more.


To get a ballpark idea of how much you can afford, some experts recommend spending no more than 28% to 31% of your gross monthly income on your mortgage payment. So, if your monthly salary is $7,000, an appropriate mortgage could be between $1,960 and $2,170.


Finding a mortgage rate that works for you is an important step in buying your first home. Credible makes it easy to compare mortgage rates from multiple lenders.


How much home can I afford?

Before you start searching for your first home, understand all the things a mortgage lender considers as part of your home loan application. Follow these steps to calculate total housing costs and prepare for the pre-approval process.


Step 1: Calculate your gross income

To determine your homebuying budget, find out your monthly gross income. This isn't the take-home pay that hits your bank account each month. Gross income is how much you earn before any withholdings are taken out, including taxes, health insurance premiums and any 401(k) contributions.


Step 2: Tally your monthly debts

Next, add up all of your monthly debt payments for things like student loans, car payments and credit card minimum payments. Remember to include any court-ordered payments like child support and alimony. This information is used to determine your debt-to-income (DTI) ratio.


The maximum DTI allowed depends on the type of home loan you choose. For conventional loans, the maximum is 50%, and for Federal Housing Administration (FHA) loans, it’s between 43% and 50%. All of your monthly debt payments, including a new mortgage, must be within that DTI limit.


Step 3: Check your credit score and interest rate

Another major factor that impacts your home affordability is your credit score and interest rate. Check your score to get an idea of what type of interest rate you qualify for on a mortgage. You can get an estimate of rates online or get a rate quote from a lender.


Step 4: Estimate your property taxes and homeowners insurance

In addition to principal and interest, your monthly mortgage payment can include property taxes and homeowners’ insurance, unless you pay those separately. Most online property listings give an estimate of these costs based on the anticipated purchase price of the home.


Step 5: Determine your maximum monthly mortgage payment

Once you know all of these variables, you can figure out your maximum monthly mortgage payment. Use a mortgage calculator to find out the monthly payment for your ideal price range, then see how that number fits in with your overall debt-to-income ratio.


What if I can’t afford the home I want?

Consider these strategies to improve your budget for a home.


Improve your debt-to-income (DTI) ratio

There are two ways to lower your DTI: Increase your income and pay down your debt.

For instance, you could ask for a raise or take on a side hustle to boost your earnings each month.


You can also pay down debt so that you have more room for your home budget. An extra perk of lowering your debt is that your credit score will likely improve as well, which could help you qualify for a lower interest rate.

Save for a bigger down payment

Another option is to save up more cash to put towards a down payment. This lowers your overall mortgage since you're lowering the loan amount. While most home loans require a 5% to 10% down payment, you can always save up extra money by lowering your monthly expenses.


Look into down payment assistance programs

Some state and local governments offer down payment assistance to help first-time home buyers afford a home and all the expenses that come with it.


There are typically two types of down payment assistance programs:


Grants: This is a lump sum of cash that does not need to be repaid.

Forgivable loans: After a set period living in the home, these zero-interest loans are dismissed if you remain in the home. If you sell it early, you'll have to use your own money to repay the loan balance.


Consider other types of home loans

Not all mortgages offer the same terms, so it's important to explore multiple options. In fact, you might receive different rate offers from different lenders, which can impact on how much you pay each month.


Alternatively, you could also consider a non-traditional form of lending, like seller financing. This is when you work directly with the seller and create a sales contract based on terms that work for both of you. The seller must, however, own the house in full without a mortgage of their own.


Rethink your home requirements

Sometimes you simply can't afford the home you want. But that doesn't mean you can't buy a home at all. Instead, consider rethinking some of your criteria. Could you look in a less expensive neighborhood? Or choose a fixer-upper in an area you love? A less expensive home could make it easier to meet all of your financial goals, not just those related to buying a home.


Which mortgage option is right for me?

The type of mortgage rate you choose has a big impact on affordability. Here's what to consider when choosing between a fixed-rate and an adjustable-rate mortgage (ARM).


Fixed-rate mortgages

With a fixed-rate mortgage, your interest rate never changes through the entire course of the loan. This gives you a consistent mortgage payment for years to come. The downside is that it's usually higher during the first few years of the loan compared to an adjustable-rate mortgage.


Best for: If you expect to be in your home for the long-term, a fixed-rate mortgage locks in your rate. And you can always make bi-weekly payments to pay off your loan faster.


Adjustable-rate mortgages

An adjustable-rate mortgage starts with a lower fixed rate for a certain number of years. After that, it adjusts periodically based on a rate index. It could go up or down, depending on how rates are performing at the time. Say you get a 5/1 ARM. That means your fixed rate is locked in for the first five years. Then the rate adjusts every year following.


Best for: If you plan to sell the home before the rate adjusts, or if you expect to have room in your budget for potential mortgage increases. It's important to have a backup plan. A sizable emergency fund is a good starting point, although there are some cases in which you can pay your mortgage with a credit card.




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