# How Much House Can I Afford?

Buying a home can be lots of fun. It’s exciting to see all those years of dreaming come to life in a place you can finally call your own.

With so many possibilities at your fingertips, it’s easy to get caught up in the excitement before asking yourself the most important question of all: How much house can I afford? It doesn’t matter if the kitchen is fabulous or the backyard is big. If you can’t pay the mortgage each month or find the cash to fix what’s broken, your home will be a burden—not a blessing.

Figuring out how much house you can afford doesn’t have to be rocket science. Here are some tips to help you buy a home within your budget.

## Calculate the Costs

By simply crunching a few numbers, you can figure out how to buy a home that won’t bust your budget. Follow the steps below to determine how much house you can afford, and then go over the results with your spouse. You both need to be on the same page when it comes to your budget and what you can actually pay.

### 1. Add up any income you bring in each month.

Let’s say you bring home \$2,400 a month and your spouse makes \$2,600 a month. Your total monthly take-home pay would be \$5,000.

### 2. Multiply your monthly take-home pay by 25% to get your maximum mortgage payment.

If you earn \$5,000 a month, that means your monthly house payment should be no more than \$1,250. The calculator below will show you a ballpark figure for how much house you can afford based on your down payment amount and maximum house payment.

## How Much House Can I Afford?

### 3. Use our mortgage calculator to determine your budget.

Sticking with our example of an income of \$5,000 a month, you could afford these options on a 15-year fixed-rate mortgage:

• \$187,767 home with a 10% down payment (\$18,777)
• \$211,238 home with a 20% down payment (\$42,248)
• \$241,415 home with a 30% down payment (\$72,424)
• \$281,650 home with a 40% down payment (\$112,660)

Remember though that this is an estimate. Don’t forget that property taxes and homeowner’s insurance will affect your monthly payment. Our mortgage calculator is an easy way to see how those costs will impact your home-buying budget.

For example, if you plug in a mortgage amount of \$211,238 with a 20% down payment, you’ll find that your maximum monthly payment of \$1,250 increases to \$1,515 when you add in \$194 for taxes and \$71 for insurance. To get that number back down to a monthly housing budget of \$1,250, you’ll need to lower the price of the house you can afford to \$172,600.

Use the calculator to try out other combinations to find the right mortgage amount, interest rate and down payment combo that will work for your budget.

### 4. Factor in homeownership costs.

Your emergency fund can cover major home disasters. But if you’ll be paying homeowner association fees or saving up for a few home upgrades, you’ll need to build room in your monthly budget for those expenses. Just be sure they don’t take away from bigger financial goals—like saving for retirement.

Be sure to figure homeownership expenses in your monthly budget. These costs may include:

• Utilities
• Ongoing maintenance and repairs
• Furniture and décor

Your down payment plays an essential role in determining how much home you can afford. The more cash you put down, the less money you’ll need to finance. That means lower mortgage payments each month and a faster timeline to pay off your home loan! Just imagine a home with zero payments!

The best way to buy a home is with 100% cash. But most people don’t want to postpone homeownership until they can pay cash. To get a better interest rate—and to keep from financing 100% of the cost of your home—you need to put at least 10% down. A 20% down payment is even better; when you put 20% down, you aren’t required to pay private mortgage insurance (PMI). PMI protects the mortgage company in the event you don’t make your payments and they have to take back the home (foreclose). It usually costs 1% of the total loan value and is added to your monthly payment.

PMI may change how much house you thought you could afford, so be sure to include it in your calculations if your down payment will be less than 20%. Or, you can adjust your total home price range so you can put down at least 20% in cash.

Want to learn more about how to save up a down payment on a house fast? Our 5-Day Home-Buyer Savings Plan will help you discover simple tricks to save a five-figure down payment by this time next year!

## Don’t Forget About Closing Costs

A down payment isn’t the only cash you’ll need to save up to buy a home. On average, closing costs are about 4% of the purchase price of your home.(1) Your lender and real estate agent will let you know exactly how much your closing costs are so you can pay for them on closing day. These costs cover important parts of the home-buying process, like appraisal fees, home inspections, credit reports, attorneys and homeowner’s insurance.

Don’t forget to factor your closing costs into your overall home-buying budget. If you’re purchasing a \$200,000 home, multiply that by 4% and you’ll get an estimated closing cost of \$8,000. Add that amount to your 20% down payment (\$40,000), and the total cash you’ll need to purchase your home is \$48,000.

\$200,000 x 4% = \$8,000

\$8,000 + \$40,000 = \$48,000

If you don’t have the additional \$8,000 for closing costs, you’ll either need to hold off on your home purchase until you’ve saved up the extra cash, or you’ll have to shoot a little lower on your home price range. Whatever you do, don’t let the closing costs keep you from making the biggest down payment possible. The bigger the down payment, the less you’ll owe on your mortgage!

## Get Pre-Approved for a Mortgage

In just a quick conversation with you about your income, assets and down payment, a lender can prequalify you to buy a house. Getting preapproved takes a little more work; a lender will need to verify your financial information and submit your loan for preliminary underwriting. Although it takes some extra time to get preapproved, it’s worth it when you begin your home search. A preapproval letter shows you’re a serious buyer.

But here’s a word of caution: Your mortgage lender will most likely approve you for a bigger mortgage than you can actually afford. Do not let your lender set your home-buying budget. Ignore the bank’s numbers and stick with your own.

## Know Which Mortgage Option Is Right for You

Bad financing can turn your biggest asset into a liability. That’s why getting the right mortgage is so important! Setting boundaries on the front end makes it easier to find a home you love that’s in your budget.

Here are the guidelines we recommend:

• A fixed-rate conventional loan. With this option, your interest rate is secure for the life of the loan, leaving you protected from rising rates. Any other mortgage option is a terrible idea.

• A 15-year term. Your monthly payment will be higher with a 15-year term, but you’ll pay off your mortgage in half the time as compared to a 30-year term—and save thousands in interest.

• A monthly payment that’s no more than 25% of your monthly take-home pay. This leaves plenty of room in your budget to achieve other goals like saving for retirement or putting money aside for your children’s college fund.

## Work With a Buyer’s Agent

Though your search for homes may start online, it shouldn’t end there. You can do a lot of research on your own, but you need the help of an expert when it comes to actually finding and securing your perfect home. An experienced real estate agent can help you figure out how much house you can afford and what kind of homes you can expect to find, considering your market and price range.

A good real estate agent will also talk you through all the extra expenses of buying a home so you know—before you start shopping—if you have enough cash to get the kind of home you want. And if you ever come across a confusing fee or expense, your agent will give you the details you need to make sure you’re not paying more than necessary.

How does a buyer’s agent get paid? In most cases, the seller pays the fees, so using a buyer’s agent is free to you.

What should you look for in a buyer’s agent? You may know a lot of real estate agents in your area. But keep in mind that not all agents bring the same knowledge and experience to the table. You want an expert who can show you how to buy a home! A true rock star will have the following:

• Specific experience assisting home buyers like you
• Full-time real estate experience for at least two years
• Great communication skills
• A super-serving attitude that makes you feel like you’re their only client
• An impressively long list of homes sold every year
• Exceptional experience in your local market

A real pro won’t shy away from tough questions. They’ll be a mover and a shaker, ready to fight for your best interests as you search for the right house and negotiate the terms of the contract. As a home buyer, working with a rock-star agent is one of the biggest advantages you can give yourself!

If you’re looking for a local real estate agent who will offer you the same trustworthy advice no matter your budget, give our recommended real estate Endorsed Local Providers (ELPs) a try. Our ELPs understand the financial path you’re on and won’t push you to overspend on a house just so they can bring home a bigger commission check.

An ELP will work to negotiate the best deal on the home that’s right for you. Contact one of our agents today!

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