When it comes to buying a home, one of the most important questions is, “How much mortgage can I afford?” The amount you can afford depends on several factors.
These factors include your income, existing debts, credit score, down payment, and interest rates.
Understanding each of these factors will help you figure out how much home you can realistically afford.
In this article, we’ll break down each of these factors, give you simple examples, and show you how they affect your mortgage affordability.
We’ll also include a few helpful tables to make things even clearer.
1. Income: The Foundation of Your Mortgage Affordability
Your income plays a huge role in determining how much mortgage you can afford.
Lenders typically look at your gross income (the money you make before taxes) when deciding how much they are willing to lend you.
The more money you earn, the higher your mortgage affordability will be.
What Lenders Look At:
- Gross Income: Your total income before taxes and other deductions.
- Debt-to-Income (DTI) Ratio: This is a percentage of your income that goes toward paying your debts. Lenders use it to decide if you can afford to take on a mortgage.
For most loans, your monthly debt payments (including the new mortgage payment) shouldn’t exceed 43% of your gross income.
Some lenders may allow higher DTI ratios for special programs, but 43% is the common maximum.
Example of Income Impact:
| Monthly Gross Income | Maximum Mortgage Payment (43% DTI) | Other Debt Payments (Student loans, car loan, etc.) | Remaining for Mortgage Payment |
|---|---|---|---|
| $4,000 | $1,720 | $300 | $1,420 |
| $5,000 | $2,150 | $500 | $1,650 |
| $6,000 | $2,580 | $700 | $1,880 |
Tip: The more you earn, the more you can afford to pay for your mortgage. But lenders will also consider your existing debts when making their decision.
2. Existing Debts: How Much You Owe Matters
Lenders don’t just look at your income they also consider your existing debts.
If you’re already paying off loans for things like credit cards, student loans, or car payments, those debts will be factored into your affordability calculation.
The more debt you have, the less room you have for a mortgage payment.
Your debt-to-income (DTI) ratio is the key metric here.
It compares how much you owe each month to how much you earn.
Example of Existing Debt Impact:
| Monthly Income | Existing Debts | Maximum Total Monthly Debt (43% DTI) | Room Left for Mortgage Payment |
|---|---|---|---|
| $4,000 | $500 | $1,720 | $1,220 |
| $5,000 | $1,000 | $2,150 | $1,150 |
| $6,000 | $1,500 | $2,580 | $1,080 |
Tip: Reducing your existing debt will free up more room for your mortgage payment. Paying off high-interest debts like credit cards can help you qualify for a bigger mortgage.
3. Credit Score: Your Financial Reputation
Your credit score is a number that represents how reliable you are when it comes to borrowing money.
It’s based on your credit history and helps lenders predict how risky it is to lend to you.
A higher credit score means you’re more likely to get approved for a mortgage, and you may be able to secure a lower interest rate.
A lower score might make it harder to qualify, and if you do get approved, the lender might charge you a higher interest rate to compensate for the higher risk.
Example of Credit Score Impact:
| Credit Score | Interest Rate | Monthly Mortgage Payment (for a $200,000 loan over 30 years) |
|---|---|---|
| 740+ | 3.5% | $898 |
| 700-739 | 4.0% | $955 |
| 660-699 | 4.5% | $1,013 |
| 620-659 | 5.0% | $1,072 |
Tip: If your credit score is lower than you’d like, consider improving it before applying for a mortgage. Pay down existing debt and make payments on time to boost your score.
4. Down Payment: How Much Money You Have Saved
The down payment is the amount of money you put toward the purchase of your home upfront.
It’s usually a percentage of the home’s price.
The more money you can put down, the smaller your loan will be, which can lower your monthly payments.
Most lenders prefer a down payment of at least 20%, but there are loan programs that allow lower down payments, such as FHA loans (which allow as little as 3.5% down).
Example of Down Payment Impact:
| Home Price | Down Payment (20%) | Loan Amount | Monthly Payment (for 30 years, 4% interest) |
|---|---|---|---|
| $200,000 | $40,000 | $160,000 | $763 |
| $250,000 | $50,000 | $200,000 | $954 |
| $300,000 | $60,000 | $240,000 | $1,145 |
Tip: If you can afford a larger down payment, you can reduce your monthly mortgage payment and avoid paying private mortgage insurance (PMI), which is required for down payments below 20%.
5. Interest Rates: The Cost of Borrowing
The interest rate is the cost of borrowing money from the lender.
It’s usually expressed as a percentage of the loan amount.
The higher the interest rate, the higher your monthly mortgage payments will be.
Interest rates are affected by many factors, including the economy, inflation, and your credit score.
A lower interest rate can save you thousands of dollars over the life of your loan.
Example of Interest Rate Impact:
| Loan Amount | Interest Rate | Monthly Payment (30 years) | Total Interest Paid Over 30 Years |
|---|---|---|---|
| $200,000 | 3.5% | $898 | $123,000 |
| $200,000 | 4.0% | $955 | $158,000 |
| $200,000 | 5.0% | $1,073 | $186,000 |
Tip: Shop around for the best interest rate. Even a small difference in rates can have a big impact on your monthly payments and total cost over time.
Putting It All Together: How These Factors Affect Your Mortgage
When deciding how much mortgage you can afford, all these factors work together.
Here’s an example of how different factors can impact affordability:
Example:
| Factor | Low Impact | Medium Impact | High Impact |
|---|---|---|---|
| Income | $4,000/month | $5,000/month | $6,000/month |
| Existing Debts | $500/month | $1,000/month | $1,500/month |
| Credit Score | 620-659 | 660-699 | 740+ |
| Down Payment | 3.5% | 10% | 20% |
| Interest Rate | 5.0% | 4.0% | 3.5% |
Tip: Use this table as a reference to see how changing each factor could affect your mortgage affordability.
Conclusion
Your ability to afford a mortgage depends on several key factors: your income, existing debts, credit score, down payment, and interest rates.
By understanding how each factor affects your affordability, you can make better decisions about how much home you can realistically buy.
Take the guesswork out of your mortgage calculations by using our free mortgage calculator!
It’s an easy tool to help you see how these factors impact your monthly payments.
You can also use the Free Home Affordability Calculator to check how much house you can afford based on your budget and location.
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If you’re ready to see how all of these factors come together, use our Free Mortgage Calculator for personalized estimates!
To get a better understanding of how all these factors come together in your mortgage calculations, check out our Comprehensive Guide on How Much Mortgage You Can Afford for a full breakdown of everything you need to know to make confident choices about your home.