How to Determine Home Affordability

A large blue home with a wrap around porch.

How Much House Can You Afford?

One of the most important questions to ask yourself before beginning the journey of homeownership is understanding how much house you can afford. Likewise, the realization that simply because you were approved for a certain loan amount, it may not be in your best financial interest to use the maximum amount. Buying a home is a major financial decision, and overbuying can strain your monthly budget and dig a hole that puts your personal finances at risk for a long time to come.

Lenders use several factors to determine how much house you can afford to borrow based on your income. These factors include debt-to-income ratio, down payment, closing costs, and your credit score. While it may seem complicated, understanding these factors can help you determine your budget and make informed decisions before shopping for a home.

Calculate Your Debt-to-Income Ratio

Your debt-to-income (DTI) ratio is a key factor that lenders consider when figuring out how much house you can afford. Your debt-to-income ratio is calculated by dividing your monthly debt payments (such as housing, credit card payments, car payments, and student loans) by your gross monthly income. For example, if you make $60,000 and have total monthly payments of $1650, your DTI is 33%. Most lenders prefer a DTI which is under 36%, but this varies by lender.

Consider Your Down Payment and Closing Costs

Your down payment is another important factor that lenders use when determine your maximum loan amount A larger down payment may help you qualify for a lower interest rate and lower your monthly mortgage payments. Most lenders require a down payment of at least 3% of the purchase price, but a larger down payment can help you save money in the long run, reduce your DTI and your risk to the lender.

In addition to your down payment, you'll also need to consider closing costs. Closing costs typically range from 2% to 5% of the purchase price of the home. These costs include things like appraisal fees, title fees, and attorney fees. It's important to factor these costs into your budget when determining how much house you can afford.

Look at Mortgage Rates

Mortgage rates have a significant impact on how much house you can afford. A lower interest rate can help you qualify for a larger loan amount, while a higher interest rate can limit your buying power. It's important to shop around for the best mortgage rate to ensure that you're getting the best deal.  Although a quarter or half percentage may not seem like a big deal, a small difference in interest rates can lead to you paying tens of thousands of dollars in additional interest over the life of your loan! But ultimately, selecting a lender you’re comfortable with is key. Your mortgage loan advisor can walk you through the options and help you make key decisions.

Work With KEMBA Financial Credit Union to Get Pre-approved for a Mortgage

The best way to know how much home you can afford is to get pre-approved. Your pre-approval not only helps you shop for houses in your budget, but also gives you an advantage over other buyers who don’t have financing lined up. Use our free online mortgage calculator to estimate your monthly payments. KEMBA is the largest credit union in Central Ohio and offers mortgage preapproval at any of our 12 branches. You can also contact our local, dedicated associates at 614.235.2395 and select Option 2 to start the process.