Use the information below as a STARTING POINT to determine how much home you can afford to buy. Note that these are generally maximum ranges. It is advisable to purchase a home for less than the absolute maximum for which you could be approved, to allow some breathing room in your budget.
Once you determine how much home you can afford, click HERE to see what your monthly mortgage payments might be.
Mortgage lenders calculate affordability based on your personal information, including income, debt expenses and size of down payment. Here are some of the factors that lenders consider:
Debt-to-income ratios
Lenders will calculate how much of your monthly income goes toward debt payments. This calculation is called a debt-to-income ratio.
The debt-to-income ratio is the percentage of monthly income that is spent on debt payments, including mortgages, student loans, auto loans, minimum credit card payments and child support.
For example: James and Amanda together earn $10,000 a month. Their total debt payments are $3,800 a month. Their debt-to-income ratio is 38 percent.
$3,800 / $10,000 = 0.38
Front-end ratio
A standard rule for lenders is that your monthly housing payment (principal, interest, taxes and insurance) should not take up more than 28 percent of your income before taxes. This debt-to-income ratio is called the "housing ratio" or "front-end ratio."
Back-end ratio
Lenders also calculate the "back-end ratio." It includes all debt commitments, including car loan, student loan and minimum credit card payments, together with your house payment. Lenders prefer a back-end ratio of 36 percent or less.
Ratios aren't carved in stone
Those recommended ratios (28 percent front-end and 36 percent back-end) aren't ironclad. In many cases, lenders approve applicants with higher debt-to-income ratios. Under the "qualified mortgage rule," federal regulations give legal protection to well-documented mortgages with back-end ratios (all debts, including house payments) up to 43 percent.
Credit history
If you have a good credit history, you are likely to get a lower interest rate, which means you could take on a bigger loan. The best rates tend to go to borrowers with credit scores of 740 or higher.
Down payment
With a larger down payment, you will likely need to take on a smaller loan and can afford to buy a higher-priced house.
A downpayment is money from your savings that you give to the home's seller. A mortgage pays the rest of the purchase price. It's usually expressed as a percentage: On a $100,000 home, a $13,000 down payment would be 13 percent.
You don't need to have a perfect credit score or a 20 percent down payment to qualify for a mortgage. Some lenders will accept down payments as small as 3 percent. Federal Housing Administration-insured mortgages have a minimum down payment of 3.5 percent.
You can generally get a conventional mortgage for as little as 5 percent down.
Lifestyle factors
While the lender's guidelines are a good place to start, consider how your lifestyle affects how much of a mortgage you can take on. For instance, if you send your children to a private school, that is a major expense that lenders don't typically account for. Or maybe you like to spend a lot on dining out or clothes. And if you live in a city with good public transportation, such as San Francisco or New York, and are able to rely on public transportation, you can likely afford to spend more on housing.