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How much house can you afford? We’ll help you do the math

October 5, 2022, 8:58 PM UTC
Once you know how much you’re approved to borrow, you should use this as a baseline to help determine how much you can afford each month.
Photoillustration by Fortune; Original photos by Getty Images

Certain financial milestones require quite a bit of preplanning. Among the biggest: becoming a homeowner. Buying a home is likely one of the most important purchases you’ll ever make.  

Step one in the homebuying process: knowing how much house you can afford.  

How much does it cost to buy a home?   

Home prices are up 43% since the start of the pandemic. And as of the second quarter of 2022, median home prices stood at $440,300, according to the Fed. Mortgage rates also hit a new record, standing at 6%. That’s the highest they’ve been since 2008

Price growth is expected to slow down within the next year, but these numbers can still sound daunting to prospective homebuyers—especially when these numbers don’t account for all the upfront and hidden costs that come with purchasing a home. 

3 upfront costs to consider of when buying a home   

A home’s sticker price doesn’t tell the full story. When preparing to buy a house, there are several costs you’ll need to cover before you get the keys. And while there are ways to save on these costs, you’ll need to take a close look at your budget at the start of your search to make sure you have what you need to process and finalize the purchase of your home.  

  1. Down payment: This is a percentage of your home’s sale price that you do not finance. Most lenders require that you make a down payment, but knowing exactly how much will depend on the kind of mortgage you have. Some government-backed mortgages will not require you to put any money down. “Some lenders might require a 20% down payment, while others require as little as 3% of the home’s purchase price,” says Shelby McDaniels, channel director for Corporate Home Lending at Chase bank.  
  1. Earnest money: This is an amount paid to the seller as a “good faith” deposit and is one way a buyer might show a seller that they’re serious about purchasing the home. In many cases, earnest money deposits can later be used as a credit toward down payments and closing costs. 
  1. Closing costs: Usually 2% to 5% of the home’s sticker price, closing costs cover the processing of your mortgage. This helps cover the cost of lender fees, inspection fees, title insurance, and appraisals. “While there is no way for a buyer to completely avoid paying these fees, there are ways homeowners can save on them,” says McDaniels. “Some banks offer help with their closing costs for buyers if they use the bank to finance their purchase.” 

How much house can you afford?   

Once you’ve figured out your upfront costs, knowing how that overall purchase price translates to your monthly mortgage payment will give you a better idea of what you can comfortably manage.  Here’s a closer look at a few of the key factors lenders weigh to determine how much house you can afford and how to crunch the numbers yourself.  

Get a preapproval: This will tell you how much you’re qualified to borrow to purchase your home. Lenders will ask you to provide proof of income, verification of your employment, proof of assets, your credit report, and supporting identification to start the preapproval process.  

Once you know how much you’re approved to borrow, you should use this as a baseline to help you determine how much you can afford each month.  “The best way to ensure you purchase within your means is to be fully preapproved prior to beginning your home search,” says Kristen D. Conti, broker and owner at Peacock Premiere Properties. “Today, a borrower can be fully underwritten to the point they are almost as good as cash, which makes their offer much more competitive.” 

Calculate your debt-to-income ratio (DTI): This number measures how much you pay toward your debts each month compared to your available income. Add up all your monthly debt payments, such as your car payment, student loan payment, and credit card payments. Then divide that total by your monthly gross income to get your DTI.  

The lower your DTI, the better chance you have of being approved for a loan. Most lenders prefer a DTI below 36%—any higher could raise some concerns about how well you’ll be able to manage new debt. This can also give you a better idea of whether it’s a good time to buy, or if you should hold off on purchasing a home until you lower your debt balance.  

Calculate your front-end ratio: Your monthly housing costs divided by your monthly income is known as your front-end ratio. Lenders prefer that your monthly housing costs not exceed 28% of your monthly income, although there are slightly higher thresholds for government-backed loans, which require that your monthly housing costs not exceed 31% of your monthly income. “It is important to write down every dollar you spend collectively for 90 days. This exercise can be very tedious but is also extremely helpful in ensuring you are fully prepared for homeownership,” says Conti.  

Factor in your annual income: This includes your salary and any additional income from side businesses or investments.  

Check your credit score: Your credit score will play a role in determining your interest rate and loan terms. You can check yours by visiting a free credit scoring site like Credit Karma or Experian. Your credit card issuer may also offer complimentary credit scores when you log into your online account or on your monthly statement.    

An example: Home affordability—by the numbers  

Here’s what calculating how much house you can afford might look like in practice:  

Let’s say Joe wants to purchase a home in Austin, where the median home price is $172,000. He sets out to save 20% of that median price for his down payment. Here is his financial profile: 

• Credit score: 705 (700–719 range in our calculator)  

• Annual income: $80,000 

• ZIP code: 73301  

• Average monthly debt payments (utilities, credit cards, etc.): $500  

Based on these figures, Joe could afford to purchase a $279,000 home with a 12% down payment, or about $34,000. However, most lenders prefer a down payment equal to 20% of the home’s purchase price, and in some cases, certain loans may require it.  

Making a 12% down payment could mean higher monthly mortgage payments or it could potentially lower your chances of approval if the lender feels you aren’t in the best financial position to make your payments. If you are approved, you may be required to have private mortgage insurance to help your lender reduce the risk they take on by lending money to you if you put less money down upfront.  

Taking that into account, it would be a safer bet for Joe to search for homes under $180,000 so that he can afford to make a larger down payment upfront. You can use the calculator below to see how much house you can afford.  

Other costs to keep in mind   

Apart from the upfront costs and monthly payment you’ll be responsible for, homeownership comes with various new expenses you’ll want to budget for when calculating how much you can afford to pay for your mortgage each month.  

A few costs you may want to consider budgeting for:  

  • HOA fees: Depending on where your home is located, you may be responsible for paying monthly fees to your homeowners association for community maintenance.  
  • Insurance costs: Homeowners insurance is often required by lenders, and it’s an ongoing cost if you hope to protect your home in the event of an emergency.  
  • Property taxes: Every homeowner is responsible for paying taxes on their property based on their home’s value and the tax rate in the county where the home is located.  

“You should give yourself a large cushion of affordability, because there are many hidden costs and unexpected repairs with owning a home,” says Ruth Shin, founder and CEO of PropertyNest. She suggests factoring in the costs of unexpected repairs, monthly utilities, any upgrades you plan to make, landscaping, and year-round maintenance. 

The takeaway   

When it comes to homeownership, half the battle is getting your bank account ready to make the purchase. After you’ve settled on how much you’ll need to cover your costs up to closing day, knowing how much you can afford to pay for your monthly mortgage will ensure that becoming a homeowner won’t hurt your ability to hit the rest of your financial goals. 

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