To calculate how much home you can afford, we take into account a few main things, such as your household income, monthly debts (for example, car loan and student loan payments) and the amount of savings available for a advance payment. As a home buyer, you’ll want to have some level of comfort in understanding your monthly mortgage payments.
While your household income and regular monthly debt can be relatively stable, unforeseen expenses and unexpected expenses can take a toll on your savings.
A good rule of thumb when it comes to affordability is to have three months of payments in reserve, including your housing payment and other monthly debt. This will allow you to cover your mortgage payments in the event of an unforeseen event.
An important metric that your bank uses to calculate the amount of money you can borrow is the DTI ratio – compare your total monthly debt (for example, your mortgage payments, including insurance and property tax payments) to your monthly income before tax.
Depending on your credit score, you may qualify for a higher ratio, but in general, housing expenses should not exceed 28% of your monthly income.
For example, if your monthly mortgage payment including taxes and insurance is $ 1,260 per month and you have a monthly income of $ 4,500 before taxes, your DTI is 28%. (1260/4500 = 0.28)
You can also reverse the process to find what your housing budget should be by multiplying your income by 0.28. In the example above, this would allow a mortgage payment of $ 1,260 to reach an DTI of 28%. (4500 X 0.28 = 1260)
To calculate how much house you can afford, we assumed that with a down payment of at least 20%, you might be better served with a conventional loan. However, if you are considering a lower down payment, up to a minimum of 3.5%, you can request a FHA loan.
FHA guaranteed loans also have more relaxed eligibility standards – something to consider if your credit score is lower. If you would like to further explore an FHA loan, use our FHA Mortgage Calculator for more details.
Conventional loans can come with down payments as low as 3%, although qualifying is a bit more difficult than with FHA loans.
With a military connection, you can get a VA loan. This is a big deal, because mortgages guaranteed by the Department of Veterans Affairs generally do not require a down payment. The NerdWallet Home Affordability Calculator takes this major benefit into account when calculating your custom affordability factors.
Remember to select “Yes” under “Loan Details” in the “Are you a Veteran?” Section. ” box.
To learn more about the types of mortgages, see How to choose the best mortgage.