How Much House Can I Afford?

Buying a house is a big deal. And if it’s your first home, it’s an exciting and important financial milestone. It’s getting more expensive to rent. Prices rose in 66% of U.S. counties between March and April of this year. So, owning your home may be a good way to hedge against growing housing costs. 

Are you wondering “how much home can I afford?” The National Association of Realtors reports that the 2019 median price of a home in the U.S. is $277,000. Is that within your price range? Here’s how you can figure out how much house you can buy before you go house hunting.

4 Rules for Determining How Much House You Can Afford

Let’s look at four ways financial advisers and mortgage lenders use to decide how much a qualified buyer can borrow:

1. The Rule of 20

Don’t buy a home unless you can afford to put 20% down. While lenders may approve you for a mortgage with a smaller down payment, you’ll have to pay for Private Mortgage Insurance (PMI). 

PMI adds up. The average cost is between 0.5% to 1.0% of the loan amount. Not putting 20% down on your home will cost you an extra $250 per month in PMI. You’re better off taking time to save enough for a larger down payment. Pay that money into your home’s equity instead of to an insurance company.

2. The Rule of 28

Your monthly household expenses, including mortgage payments, property taxes and insurance should be no more than 28 percent of your gross (before taxes) income. Most traditional lenders will not lend you more than that percentage.

If your household’s combined annual income is $90,000, your housing expenses shouldn’t be higher than $2100 per month.

3. The Rule of 36

Add up your mortgage expenses and other debt like car payments and student loans. Total monthly debt payments should not exceed 36% of your gross income. If your personal loan payments are high, adjust how much you should spend on your mortgage to less than 28%. 

For example, if your household’s combined annual income is $90,000 and you have $900 per month in other loan payments, you may have to adjust your target mortgage payment amount to $1800 per month stay within the 36% debt total.

4. The Rule of 3

Lenders will expect you to have a set amount in savings to cover your mortgage expenses for a few months. Make sure you have at least 3 months worth of home expenses put away in case of an emergency, like losing your job. Doing so will keep you from feeling rushed while job hunting, as well as save your credit score because you didn’t fall behind on your payments.

Now that you have an idea of what your monthly mortgage payment can and should be, you can estimate how much home you can afford. You won’t know the exact interest rate you’ll be paying yet. But by using an online mortgage calculator and plugging in a 20% down payment with an average interest rate of 5% on a 30-year mortgage, you’ll get a good idea of how much house you can afford.

If you’ve calculated that you can spend up to $1800 per month on your mortgage and can put 20% down, you can afford a $420,000 home. 

Don’t forget to set aside money for your closing costs. Multiply a home’s price by 4% to estimate the amount you’ll need. A $300,000 home will likely cost you $12,000 in closing costs to cover attorney fees, a title search, title insurance and taxes.

The Real Cost of Buying a Home

Just because you can afford a $420,000 home doesn’t mean you should buy one. Bigger homes cost more to heat, cool and maintain. Other monthly expenses, like insurance and HOA fees can exceed your monthly budget. Here are Zillow’s national averages on the most common expenses:

  • HOA fees: from $200 to $400 per month on average
  • Homeowners insurance: an average of $35 per month for every $100,000 of your home’s value
  • Maintenance and repairs: an additional $3,021 per year
  • Property taxes: $2,110 per year
  • Utilities (cable, electricity, gas, internet, water): $2,953 in utility costs per year

Real estate statistics show that Americans spend, on average, 50% of their household income and earnings on their home. Don’t fall into that trap.

How To Afford A More Expensive Home

If you have your eye on a home that’s just out of your price range, there are some ways you can work around it. Location, good credit score and a larger down payment are some ways you can get more house for less money. Here are the details:

Down Payments vs. Mortgage Payments

Saving 20% or more to use as a downpayment for your home may seem hard – but it’s a wise choice. The bigger your down payment, the less you need to borrow. Here are some reasons why you should put at least 20% down:

  • You can buy more house
  • You’ll have a lower monthly mortgage payment
  • You’ll probably get a better interest rate
  • You’ll save thousands in interest over the life of your loan 
  • You won’t have to pay for Private Mortgage Insurance (PMI), which can cost you hundreds per month

Why Your Credit Score Matters

Your credit score is one of the top factors that lenders use to decide if they’ll approve you for a loan and what your interest rate will be. The higher your credit score, the lower your interest rate. And that can make a big difference in your monthly mortgage payment. Compare your monthly mortgage payment for a $250,000 loan: 

  • 4% interest: $1194
  • 6% interest: $1499

That’s a difference of more than $300 per month. A lower credit score can cost you more than $100,000 over the life of your $250,000 loan, which means your credit score affects how much home you can afford. Paying a higher interest rate means higher mortgage payments compared to someone with good credit. Buyers with better credit can get more house for the same monthly payment. 

Location Makes A Big Difference In How Much House You Can Afford

If you prefer a larger home, changing locations may make buying a larger home with more amenities possible. Zillow’s 2019 Home Value Market Report lists the most affordable and most expensive cities in America to buy a home in.

Least Affordable Cities for Home Ownership

Metro Area
Median Home Price, 2018
San Jose, CA
$1,100,000
San Francisco, CA
$860,000
Los Angeles, CA
$634,000
Honolulu, HI
$600,000
Oxnard, CA
$589,000
San Diego, CA
$545,000
Seattle, WA
$430,000
Boston, MA
$410,000
New York, NY-NJ
$410,000
Denver, CO
$383,000
Sacramento, CA
$375,000
Washington D.C.
$375,000
Portland, OR
$370,000
Bridgeport, CT
$356,000
Riverside, CA
$339,000

Home buyers in these areas may feel more obligated to stretch themselves, especially when rents are already oppressively high. The New York Times has a pretty comprehensive rent-versus-buy calculator, with a number of adjustable inputs to help you evaluate whether it makes sense to continue renting or to buy a home given the variables of your own situation and locality.

Most Affordable Cities for Home Ownership

Metro Area
Median Home Price, 2018
Youngstown, OH
$77,000
Scranton, PA
$100,000
Toledo, OH
$109,000
Syracuse, NY
$112,000
Dayton, OH
$120,000
El Paso, TX
$124,000
Indianapolis, IN
$125,000
Cleveland, OH
$128,000
Akron, OH
$135,000
Rochester, NY
$137,000
Pittsburgh, PA
$138,000
Columbia, SC
$139,000
Greensboro, NC
$140,000
Buffalo, NY
$141,000
Memphis, TN
$142,000

What Size Mortgage Can You Afford? It’s Really Up to You.

Keep in mind, just because a lender or realtor tells you how much house you can afford, it doesn’t mean that amount is right for you. Follow the 4 rules to calculate your approximate price for your home while factoring in your monthly expenses like insurance and upkeep. Make sure you save a sizable down payment and work on upping your credit score to get the most for your money.

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