How Much Mortgage Can I Afford, Based on Income?

Kelly Hernandez
A woman in deep thought calculating a mortgage while a house and a percentage sign are drawn on a chalkboard behind her.

If you’re trying to figure out how much house you can afford, there are many factors you should consider, both personal and financial. A loan originator can easily use your debt-to-income ratio and credit score to provide you with a loan amount you could qualify for. However, it’s important to remember that while a loan officer can offer you a mortgage for the home you want, it may not always mean it’s the home you can afford.

Before you can determine how much mortgage you can afford, you’ll need to analyze your own personal circumstances, monthly budget, and how financially stable you are. It’s also important to review ongoing homeownership costs and upfront costs you’ll need to provide at closing. Learning how to obtain a mortgage for a new home purchase while staying financially comfortable and saving for your goals is more important than calculating the loan amount a lender will provide to you.

Table of Contents

Upfront Costs

When you’re going through the homebuying process, the home you can afford is also dependent on the upfront costs you’ll be responsible for. These are the expenses you’ll encounter as you shop for a home and that you’ll need to pay before you close on the home. Calculate the costs you’ll incur and ensure you have enough before you decide how much you want to spend on a home.

Keep in mind, these upfront costs usually cannot be financed, so you’ll need to have a lump sum available before you attempt to buy a home. Some of the costs you should factor into how much home you can qualify for include:

  • Earnest money (escrow deposit).
  • Down payment.
  • Mortgage application fees.
  • Closing costs.
  • Inspection fees.

You may not know exactly how much these specific items cost until you find a home you’re interested in, which can make them hard to budget for before you begin your home search. However, your real estate agent or mortgage broker can provide you with estimated costs to help you better understand approximately how much you’ll be responsible for paying before closing.

Home Ownership Costs

When figuring out your personal mortgage affordability and what you feel comfortable with financially, you’ll need to consider the costs of homeownership. Most of these costs are generally ongoing for as long as you own the home. In some cases, these expenses are built into the mortgage, such as mortgage insurance. However, additional homeownership costs may include:

  • Homeowner’s insurance.
  • Flood insurance.
  • Home maintenance and repairs.
  • Utility bills.
  • Furnishings and decor.
  • Property taxes.
  • Homeowner’s Association (HOA) fees.

Some homeownership expenses, such as home repairs, can fluctuate monthly. It’s important to be prepared for these fluid expenses by staying financially stable and keeping a reliable emergency fund available.

Debt-to-Income and Income-to-Mortgage Ratio

Your debt-to-income ratio is an important consideration for both your lender and yourself when figuring out how much home you can afford. There’s a general rule that the maximum amount you should pay for your monthly mortgage payment is 28% of your monthly income.

Some lenders allow for a higher ratio, while others use a lower percentage when calculating how much home a buyer can afford. No matter what percentage your potential lender uses, only you should decide the debt-to-income ratio and mortgage payment you feel comfortable with.

The 28/36 rule is another general rule that can help you calculate the mortgage payment you can afford. This rule states that you shouldn’t spend more than 28% of your monthly income on housing and that no more than 36% of your total monthly income should be spent on debt. Some of the most common sources of debt may include car loan payments or credit card bills. This rule ensures your income isn’t solely spent on your mortgage payments and other debts. By following the 28/36 rule, you should be able to save for retirement, keep an emergency fund, and make progress toward other long-term financial goals.

Credit and Interest

The interest rate you’re offered for your mortgage will also determine the loan amount you can comfortably afford to borrow. A higher interest rate means a higher monthly mortgage payment, while a lower rate makes your monthly mortgage payments more affordable. Over the course of your loan, you’ll pay more for your home if you have a higher interest rate since each payment you make contributes to both principal and interest. Therefore, in some cases, a lower interest rate can save you thousands.

The interest rate a lender offers you is largely determined by your credit score. To get the lowest possible interest rate, you’ll need to ensure your loan application is appealing to potential lenders and a good credit score is helpful in that regard. It’s important to know your credit score and review your report before you begin the mortgage application process. Contact a credit bureau to correct any errors you see on your report and make sure they’re resolved before submitting a loan application.

How to Maximize Your Loan

If you want to maximize the loan amount you qualify for, you’ll need to ensure the lender sees you as a financially responsible and capable borrower. You can take certain actions to enhance your loan application and potentially improve the loan terms you’re offered, including:

  • Improving your credit score.
  • Paying off your debts.
  • Shopping around for the best loan terms.
  • Saving for a larger down payment.
  • Combining your income with a co-partner or spouse.
  • Consistently paying bills on time.

By implementing good financial habits over time, you can increase the loan amount you qualify for, which also increases the amount of house you can afford.

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