- Current Expenses
- Interest Rates
Everyone has different financial goals and obligations, so before doing any home shopping, you should set your own budget to determine how much you can afford to pay towards a mortgage and maintain a comfortable lifestyle. Just because you might be able to get approved for a certain amount by the bank doesn’t mean you’ll be comfortable paying that amount every month. So, create a budget that is realistic for your financial situation.
Practically every lender will want to know that you have a comfortable amount of savings before they approve you for a loan, so make sure you have a substantial amount of liquid funds. You’ll need to have enough saved to pay the down payment, which should be between $19,000 and $104,000, depending on the loan size and the lender’s requirements. But you also don’t want to put all of your savings toward the down payment, so be sure that you have a decent cushion left over to prepare for emergencies.
While setting your budget, you should also look at your current expenses. If you have debts or expenses that you need to pay, you should consider them when applying for a loan. Your debt-to-income ratio will impact the interest rate given to you by a lender. You should also consider other expenses such as childcare, utility bills, phone bills, internet, and any additional regular payment you have when creating your financial plan.
The current interest rates will also impact how much home you can reasonably afford. While your lender will assign you a specific interest rate based on your financial credentials, they are also impacted by broader economic factors. Interest rates set by the Federal Reserve will determine how much it costs for banks to borrow money from each other, which will also affect how much it costs to lend money to you. So, pay attention to the economy, in addition to taking stock of your own financial situation.
Personal finance experts recommend spending no more than 28% of your gross monthly income on your mortgage payments. So, if you have a $150,000 salary, you should spend at most $42,000 per year or $3500 per month. While you may be comfortable with more or less depending on your financial situation, the 28% rule is a good rule of thumb when creating a budget. Here are a few examples of how the 28% rule can help determine how much house you can afford.
- Great Credit Full Down Payment
- Good Credit Average Down Payment
- Low Credit Low Down Payment
1. Great Credit Full Down Payment
Credit Score: 750
Down Payment: 20%
Interest Rate: 7.112%
Max Home Price: $521,200
With a credit score of 750 and a full 20% down payment, you could be approved for an interest rate of about 7.112%., which means a monthly loan payment of about $2805 and an additional $695 in taxes and fees. Therefore, the most expensive home you could afford would be worth about $521,200 while still observing the 28% rule.
2. Good Credit Average Down Payment
Credit Score: 700
Down Payment: 12%
Interest Rate: 7.327
Max Home Price: $448,500
You would likely be approved for an interest rate of about 7.327% with a 700-credit score and a 12% down payment, which would mean a monthly loan payment of about $2,721 and additional taxes and fees of about $779. So, to stay within the 28% rule, the most expensive home you could afford is about $448,500.
3. Low Credit Low Down Payment
Credit Score: 650
Down Payment: 5%
Interest Rate: 7.835%
Max Home Price: $392,000
A credit score of 650 and a down payment of 5% would result in an interest rate of about 7.835%. So, you would end up with a monthly loan payment of around $2,736 and an additional $764 in taxes and fees. Based on those figures, to adhere to the 28% rule, the most expensive home you could afford would be worth about $392,000.
The size and value of the home you purchase will depend on many factors, including your finances and what you require to live a comfortable lifestyle. While the numbers play a major role, you must feel confident that you can keep up with payments and other home ownership costs. So, while you will need to create your own budget, generally speaking, you should be able to afford a home in the ballpark of $380,000 to $525,000 with a $150,000 salary.