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How Much Home Can You Afford? A Guide for Understanding Mortgage Affordability

How Much Home Can You Afford? A Guide for Understanding Mortgage Affordability

So… you think you’re ready to dive into the housing market and purchase a new home. Congratulations! Now, what?

It’s time to start looking at what’s available on the market, right? Actually, wrong.

Before you begin to search for homes that are for sale in your desired area, you need to have an accurate grasp on just how much house you can afford. Why should you go through all the trouble of finding a home and falling in love with it, only to find out that you ultimately cannot afford it?

If you’re new to the home-buying process and don’t even know where to begin to figure out how much house you can afford, don’t panic. There are various online mortgage affordability calculators that will help you determine what you can afford.

Just like many lenders do, these online mortgage affordability tools take several aspects of your financial picture into consideration. Among three of the most important things to consider when determining how much house you can afford are your income, debts and future housing costs.

Income – When you go to apply for a mortgage on a new home, any lender is going to want to know about your income. This all-encompassing term should include your base salary, plus any commissions, bonuses or tips that may help to make up your gross annual income.

Lenders will also take into consideration your savings and any income that you make from rental properties or other investments, along with alimony, child support or financial gifts that you anticipate. All of these variables affect your overall income and the amount of house that you can afford.

Debts – What is the minimum amount of money that you pay out on a monthly basis? When you’re tallying up your monthly expenses, include all car payments, student loans, credit cards, alimony and child support payments that you may be obligated to make.

Remember that although you may have a plan for paying off some of those debts, lenders are only interested in what’s on paper. So, if you do have a plan for eliminating debts before applying for a home mortgage, put it into effect before you seek lender pre-approval. This will likely increase the price of a home that you’re able to afford.

Housing Costs – When you think about what you can afford in a home, in addition to your current income and expenses, you also need to consider some basic common costs that accompany home ownership. Those costs include things like property taxes and homeowner’s insurance. If you’re interested in buying a condo, townhome or a home in any newly-established community that shares certain amenities like trash disposal or cable and internet service, you may also need to account for monthly homeowner’s association (HOA) fees as well.

Finally, your potential down payment also plays a big role in the amount of home that you’ll be able to afford. If you’re planning to put less than 20% of the home’s purchase price down, you may have to account for monthly private mortgage insurance or PMI payments that could detract from the price of a home that you are able to afford. 

Being armed with up-to-date information about your income, expenses and potential future housing costs is all you need to get a ballpark figure on what you can afford in a new home. Once you’ve compiled that information, an online affordability calculator may be able to offer you a fairly accurate estimate of what you can afford.

By entering in your financial information, an affordability calculator will evaluate your debt-to-income ratio and churn out a suggested home price that can help you to start your home search. Keep in mind that these online tools are helpful, but they are not mortgage pre-approval. They likely will not include your personal savings goals or account for cash that you may want to set aside for unexpected home repairs or other financial emergencies.

The best way to determine what you can afford when it comes to purchasing a new home is to meet with a lender and gain pre-approval. With that pre-approval letter in hand, you are letting your realtor and a potential seller know that you mean serious business when it comes to buying a home.

Ultimately, knowing what you can afford will make for a less stressful home search and closing process for you! If you’re interested in learning how much home you can afford, we’re happy to recommend these preferred mortgage calculators. If you’re already armed with your affordable home price in mind and you’re ready to start your home search today, contact a trusted Berkshire Hathaway HomeServices The Preferred Realty agent.


This post is sponsored by PA Preferred Mortgage:

Pennsylvania Preferred Mortgage is a full service mortgage banker and is a member of the Prosperity Home Mortgage, LLC family. Specializing in residential and refinance loans, Pennsylvania Preferred Mortgage offers a wide range of mortgage products, including fixed and adjustable rate mortgages, jumbo loans, Federal Housing Administration (FHA) and Veterans Affairs (VA) loans, and renovation financing. Learn more at www.papreferredmortgage.com.