Find out How Much Home You Can Afford Based on Income and Finances
JULY 08, 2024 | Home Care Buzz Experts | 5 minute read
Whether it's your first time buying a house or your fifth, there's one question you should always ask first: How much house can I afford? In this blog, we'll cover the steps to calculate the affordability of homes. We'll help you get a clear picture of your finances to make the right decisions during the home-buying process.
Calculate Annual Income
The first item on your "how much house can I afford" checklist is to determine your annual income. It's a simple equation — your annual income is your gross income before any taxes or other deductions, plus any expected bonuses or additional revenue streams. Note that if you're buying a home with a spouse or partner, you should add your incomes together.
Calculate Your Down Payment
The next step is determining how much you can put down towards a home purchase. This step is vital to avoid being left with an empty bank account after your home purchase. A down payment of 20% of the home's purchase price is a good starting point, but if that's a bit steep, there are other options. Many lenders have options and can work with you to find the right loan type, depending on your credit score and other factors. For example, FHA loans only require 3.5% down, and VA loans (for veterans and some surviving spouses) are available with no down payment.
For more info on loan types and other real estate terms, check out our Real Estate Glossary.
Calculate Your Expected Mortgage Payment
You can use a fixed-rate mortgage formula to calculate a potential mortgage payment. The formula considers current interest rates (remember these fluctuate constantly), your down payment amount, the loan term, and a few other factors. There are a few mortgage payment calculators that can help you determine this amount:
Nerdwallet Mortgage Calculator
Wells Fargo Mortgage Calculator
Mortgage Payment Table
To give you a snapshot view, we've put together a table using the average home price in early 2024 ($393,500). We'll show you how your down payment amount and interest rate can affect your monthly payment.
| Down Payment | Loan Amount | Interest Rate | Monthly Payment |
| 5.0% ($20,000) | $380,000 | 6.5% | $2,405.12 |
| 10% ($40,000) | $360,000 | 6.5% | $2,280.16 |
| 20% ($80,000) | $320,000 | 6.5% | $2,029.01 |
| 5.0% ($20,000) | $380,000 | 5.0% | $2,039.29 |
| 10% ($40,000) | $360,000 | 5.0% | $1,932.56 |
| 20% ($80,000) | $320,000 | 5.0% | $1,719.36 |
Common Questions About Affordability
How much house can I afford with $10,000 down?
As you can see in the table above, your monthly payment is based on more than just your down payment. You'll need to consider the home's total price, interest rate, and monthly income to see if you can afford a house with a $10,000 down payment. To pay 20% down, you'd need to look at homes around $50,000. Luckily, most loan types do not require a 20% down payment.
How much house can I afford with a 100k salary? How much house can I afford with an 80k salary?
Again, you'll need to factor in much more than just your salary. Consider your other debts, savings goals, and how much you can put down to determine how much money you can apply toward your mortgage each month.
Related: Learn how to pay off your mortgage early
Understanding Closing Costs
When determining your mortgage costs, remember to account for closing costs. These costs range between 2% and 5% of your home purchase amount, so you may want to subtract that amount from your down payment to be safe. Sometimes, closing costs can be negotiated with your real estate agent, loan officer, and the home seller. Are you wondering what these fees cover exactly? Here’s a quick breakdown:
Closing Cost Breakdown
- Loan origination fee: Covers the lender's administrative costs for mortgage processing.
- Appraisal fee: Pays for a professional appraisal to determine the home's market value.
- Credit report fee: Covers the cost of accessing your credit history to evaluate your loan eligibility.
- Title search and insurance: Ensures the property title is clear of issues and protects the lender and buyer from future property disputes.
- Home inspection fee: Pays for a professional to inspect the property and identify any potential issues.
- Underwriting fee: Covers the cost of evaluating your mortgage application.
- Recording fees: Pays the local government to record the new property ownership information.
- Transfer taxes: Charged by the state or local government to transfer the title from the seller to the buyer.
- Courier fee: Covers the cost of transporting documents to complete the loan transaction.
- Flood determination fee: Pays for assessing whether the property is in a flood zone.
Add Up Household Bills
It's a good idea to estimate your household bills, especially if you're moving from a rental to your first home. If your new home is bigger than your previous house or apartment, you can expect higher utility bills. You should also account for your monthly debt payments (like credit cards, auto loans, student loans, and medical debt) when determining how much of your income you can dedicate to your mortgage payment.
Related: Pros and cons of home equity loans.
Get Prequalified
Getting prequalification from a lender can give you a good idea of how much you can qualify for on a home loan. But keep in mind that you don't want to get the most expensive house you qualify for. These prequalifications don't take into account how much of your budget you can comfortably put towards a mortgage payment.
If you're a first-time homebuyer, check out these homebuying tips.
Ask About Home Warranty Protection
Whether your home is brand new with appliances and systems to match or older with dated systems and appliances, a home warranty can help you save money and protect these assets. New appliances can be costly to repair, especially if a manufacturer's warranty does not cover them. Older ones can be a challenge since parts may be hard to find. Luckily, a real estate warranty can cover you from the day you get the keys to your home.
If you're a home seller, a home warranty can also protect you during the listing period. Plus, learn how a home warranty can help sell your home faster.
FAQs About Home Affordability
What is an adjustable-rate mortgage?
An adjustable-rate mortgage (ARM) has an interest rate that may change depending on changes in a corresponding financial index associated with the loan. Your monthly payment will typically increase or decrease if the index rate fluctuates.
What is amortization?
Amortization is the process of spreading out a loan into a series of fixed payments over time. You pay off the interest and a portion of the principal in each payment, so the balance decreases over the life of the loan.
What is APR?
APR, or Annual Percentage Rate, represents the annual cost of borrowing as a percentage. It includes the interest rate and any additional fees or costs associated with the transaction.
What is an appraisal fee?
An appraisal fee is a payment made to a professional appraiser to assess the market value of a home or property. The lender typically requires an appraisal to ensure the property's worth matches the loan amount.
How good does my credit score need to be for a mortgage?
Generally, a credit score of 620 or higher is needed to qualify for most conventional mortgage loans. However, some loan types may allow lower scores with additional financing costs.
The contents of this article are provided for general guidance only. First American Home Warranty does not assume any responsibility for losses or damages as a result of using this information.
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Home Care Buzz Experts
The First American Home Care Buzz team is made up of experienced home warranty writers and editors. Our team provides valuable insights and information to help homeowners like you meet the daily challenges of homeownership.
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