Key Factors That Affect the Mortgage You Can Afford

If you’re looking to buy a home and you’ve started browsing sales listings, then you might be asking yourself, “How much house can I afford?”

Chances are you’ll need to take out a home loan, and many factors go into determining how much a mortgage lender will let you borrow. In addition to your down payment, you’ll need to pay what could be called the “hidden” costs of buying a home, which include closing costs and the ongoing cost of owning a home. All of these play into answering the complicated question of “Can I afford a house?”

Personal Factors

• Income. First and foremost, you need to afford your monthly mortgage payment without running the risk of becoming “house poor.” This happens when people stretch their budget to buy a home and most of their income goes toward housing costs, leaving little for other expenses. A common guideline is the 28/36 rule, which states your mortgage payment shouldn’t take up more than 28% of your pretax income and your total debt shouldn’t exceed 36%.
• Debt. Having a lot of debt can affect your ability to make your mortgage payments. Lenders use a figure known as the debt-to-income ratio, which shows how much of your monthly income goes toward paying off debts. You can calculate your DTI ratio by adding up your monthly debt payments and dividing that number by your gross monthly income. Generally, lenders will require that your DTI ratio doesn’t exceed 50%, though specific lenders and loan types may require a lower ratio.
• Credit score. To be approved for a conventional loan, you’ll generally need a credit score of at least 620. Federal Housing Administration loans allow a minimum credit score of 500 with a 10% down payment. Veterans Affairs loans and Department of Agriculture loans don’t require minimum credit scores, but the lenders that issue those loans may set their own minimums.
• Savings. Your savings play a big role in determining how much of a down payment you can make and whether you’ll be able to cover your closing costs. Conventional loans are available for a down payment as low as 3%, though the larger the down payment you make, the lower the interest rate you’ll pay, and the more home equity you’ll start out with.

Loan Factors

• Loan amount. When you apply for mortgage preapproval, the lender will estimate how much it expects to lend to you. This will be based on information about your financial situation, such as your income and credit score.
• Loan type. Some loan types limit how much you can borrow. The Federal Housing Finance Agency sets annual limits for conforming loans, which are $726,200 in most places and $1,089,300 in high-cost areas for 2023. FHA loans also have a limit of $1,089,300. If you require a larger loan to buy a more expensive property, you’ll need a jumbo loan, which may come with stricter eligibility requirements.
• Interest rate. If you have a fixed-rate mortgage, then your interest rate is set for the life of the loan. As a result, your monthly mortgage payment will remain predictable. An adjustable-rate mortgage usually comes with a lower interest rate for a limited period of time, but then it will change on a scheduled basis. You’ll need to be prepared for your rate to increase, since your monthly payment will increase as well.
• Loan term. Most home loans are repaid over 30 years or 15 years, though it’s possible to ask your lender for a custom term. In general, shorter terms repay the loan more quickly, and come with higher monthly payments and a lower total cost. Longer terms take more time to repay and cost more overall, but the monthly payment is more affordable.
• Other fees. Depending on the type of loan, you may have to pay additional fees. For example, VA loans require you pay a funding fee that helps support the program.
• Discount points. Discount points are fees you pay at closing to reduce the interest rate on your loan. Buying points can lower your monthly payment and reduce the overall cost of your loan, but you have to pay more upfront.
• Mortgage insurance. This protects the lender if you’re unable to make your monthly mortgage payments. If you take out a conventional loan and put down less than 20% of the purchase price, your lender will require you to buy private mortgage insurance. You’ll have to pay PMI until you have 20% equity in the home. Mortgage insurance also is required on FHA loans.
• Closing costs. Closing costs can sneak up on homebuyers who don’t expect these fees to add up. Generally speaking, you can expect closing costs to range between 2% and 5% of the home purchase price.

Property Factors

• Home size and features. Homes vary in price based on how large they are and what features they have. A newer, sprawling house with state-of-the-art appliances and lighting systems will cost more than an older, smaller home with outdated components.
• Lot size. Beyond the size of the home itself, the size of the property affects how much you pay. For example, you might purchase a home that is modest in size but sits on a massive lot.
• Location. You’ll be able to get a larger house if you buy in a rural area than if you spend the same amount in a high-demand location such as New York City. Local markets play a big role in how much home you can afford.
• Price. A pricier home requires both a larger down payment and a bigger monthly payment.
• Market conditions. If the market is hot and home prices are increasing, it can make homeownership less attainable. Even if you’re still able to buy, you might not be able to purchase as much house as you were hoping to. But if the market has cooled and prices have dropped, it can be an opportunity to get more for your dollar.

Ongoing Factors

• Property taxes. Property taxes are levied by local governments and based on the appraised value of your home. Most homeowners use an escrow account to set aside money each month for their lender to pay this bill when it’s due.
• Homeowners insurance. This coverage pays for losses or damage to your property, and is required by most lenders. It’s also often paid for with an escrow account.
• Flood and earthquake insurance. Homeowners insurance typically doesn’t cover flood or earthquake damage, so you may want to buy additional coverage if your home is at risk for either hazard.
• HOA fees. If you buy a house that is part of a homeowners association, you’ll need to pay HOA fees to fund shared services and amenities.
• Home maintenance. Accidents happen, pipes leak, and appliances wear down over time. It’s recommended to set aside 1% to 3% of your home’s value each year for maintenance costs.
• Landscaping. Overgrown grass and vegetation can reduce your property value. On the other hand, well-maintained landscaping increases your home’s value, but comes at a recurring cost.
• Snow removal. If you live in a colder climate, you’ll need to cover the cost of snow removal.
• Pest control. If you have any unexpected “visitors,” you’ll need to pay a specialist to get rid of them.
• Utilities. You’ll need to cover the cost of utility bills, which typically include electricity, water, gas, and internet access.
• Pool or spa. If your home comes with a pool or spa, you’ll need to maintain it.

FAQ

Here are answers to frequently asked questions about factors that affect how much home you can afford.

How much house can I afford on a $100K salary?

Unfortunately, there’s no exact answer to this question. That’s because the amount of home you can afford also depends on other factors aside from your income, including your savings, debt, credit score, loan details, property type, and location.

What 4 factors affect the amount of a person’s mortgage payment?

Your monthly payment will be based on the loan principal and your interest rate. If you have an escrow account, your monthly payment also will include property taxes and homeowners insurance.