November 28, 2018

How Much Home Can I Afford?

Dreaming of owning a home and wondering how much you can afford? You're not alone. It's one of the most important questions you'll need to answer before you can begin house hunting—and many factors, aside from your income and car payment, come into play.

So, what is your number?

To determine how much you can afford, these are the two important guidelines most lenders use:

  • The Housing Expense Ratio = Ideally, your mortgage payment (principal, interest, taxes and mortgage insurance) should be less than 28% of your monthly gross income.
  • The Debt-to-Income Ratio = In most instances, your combined debt (credit cards, student loans, alimony, child support, car loans and housing expenses) should be less than 45% of your monthly gross income.

In addition to these key ratios, all the following will play a role:

  • Your income. You can get a very rough estimate of your affordable home price range by multiplying your annual gross income by 2.5 (this, of course, varies depending on current interest rates, your debt and credit history).
  • Your credit.  Generally speaking, the better your credit, the lower the cost of obtaining credit and the greater your financing options.
  • Current mortgage rates.  Although mortgage rates are rising, they're still low – making homeownership affordable for many.
  • Your downpayment. You don't need to put 20% down, as commonly believed. In fact, the average down payment for first–time homebuyers in 2017 was 5%, and 10% for repeat buyers, according to the National Association of REALTORS®. What's more, it's possible to put down as little as 3%.
  • The type of home. If you're looking to buy a condominium, keep in mind that rates are typically higher for these loans and you'll have to budget for the cost of your monthly condominium fee. 
  • Fees and closing costs. Remember to factor in the expenses and fees you will incur for a home appraisal, a home inspection, and other professional services required to buy a home. However, in some cases, the appraisal can be waived.

Visit our mortgage calculators, including How Much You Can Afford, and My Home by Freddie Mac® for more information and resources about buying and owning a home. As always, reach out to your lender to get the full picture of what you can afford.

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