How Much House Can I Afford?

Buying a house is something that demands a lot of thought. Understanding how much house you can afford will narrow down your costs and save you big bucks. This blog discusses how much house you can afford while being in the driving seat of this decision.

📉 Key Takeaways

28/36 Rule: The 28/36 rule is a home buying rule of thumb. It allows you to find how much house you can afford.
The Good Neighbor Next Door Program: This program is run by the Department of Housing and Urban Development. The program provides a 50% discount on list price of a house to select professionals.
Government Loans: Loans like the FHA loans, USDA loans, and VA loans provide buying assistance to first-time buyers.

Factors that Affect Home Affordability

There are a number of factors that affect a home’s affordability. Let us take a look at some of them:

Annual income

Annual Income is the gross income that you earn in a calendar year. Suppose you’re buying a house with a co-borrower and decide to take out a mortgage. The annual income will be your and your co-borrower’s total. This information is typically available on your W2 form.

Total monthly debts

These are the recurring payments like credit card bills, tuition expenses, car loans, etc. Factor in these costs while calculating your home affordability.

Down payment

The money paid in advance to purchase a house is called a Down Payment. The majority of home loans mandate a 3% down payment. However, paying a 20% down payment increases home affordability and lowers your monthly expenses.

Debt-to-income ratio (DTI)

One of the core metrics used by lenders to measure your repayment capacity is the DTI. Total monthly debt payments divided by total monthly gross income give you the DTI. Typically, lenders accept a DTI below 36%, but some lenders allow up to 43% as well.

Interest rate

Interest rate is the amount that a lender charges from a borrower for providing a loan. The borrower pays monthly installments with interest to the borrower until the full repayment. Your interest rate depends on your credit score. The current average rate for a 30-year fixed mortgage is 7.55%.

Loan term

The time period in which you agree to pay back the loan. Typically, this term is for 30 years or 360 months. However, multiple options are available based on the type of loan and situations that suit you best.

Additional Expenses

Expenses such as Homeowner’s insurance, property tax, and Homeowner’s Association fees collectively play an important role in your house affordability.

Ways to Improve Home Affordability

Buying a home is not like buying a candy. It involves a lot of planning, especially, financial. Described below are a few ways that improve home affordability.

Downpayment Assistance

Down Payment Assistance (DPA) Programs are government-run programs. Their purpose is to provide home loans to cover house purchase and closing costs. These DPAs enhance your home-buying budget.

Typically, DPAs cater to the needs of first-time home buyers. This doesn’t mean that if you already own a house you won’t get the assistance. It depends on your income and the area where you want to buy the house. There are more than 2,000 active DPA programs across the country.

Special Mortgages

There are professions that enjoy special mortgages. These are generally front-line workers like firefighters, first responders, and public servants like teachers, and doctors. Some countries provide special loans to government officials as well.

The Department of Housing and Urban Development (HUD) runs a “Good Neighbor Next Door Program”. This program provides a 50% haircut on the list price of a house to Law enforcement officers, firefighters, teachers, and emergency medical technicians.

The occupants will have to live in the space for at least 36 months. The only catch is that the house will be located in a revitalization area, an unpleasant neighborhood to live in,

Closing Cost Assistance

Closing costs are certainly one of those out-of-pocket expenses that disturb your housing budget. Typically, DPAs help out with closing costs but that’s not the only way. In some cases, sellers can be of help.

The housing market is largely a seller’s market, meaning the buyer has to do all the grunt work. In contrast, the sellers will likely help you if there’s a buyer’s market.

Another way is lender credits. Here you are supposed to pay a higher-than-usual mortgage rate in return for zero or minimal closing costs.

Govt. loans

The government promotes housing for its citizens. To show its support, it provides various types of loans such as:

Federal Housing Agency Loans (FHA loans)
US Department of Veteran Affairs Loans (VA Loans)
United States Department of Agriculture Loans (USDA Loans)

Follow the 28/36 Rule

The 28/36% rule is a tried-and-tested home affordability rule of thumb. The rule suggests that you shouldn’t spend no more than 28% of the total gross monthly income on home expenses, and no more than 36% on total debt. The rule sets a standard for how much you can afford to pay every month.

For instance, you earn $5000/month. According to the 28/36% rule, your mortgage payment shouldn’t exceed $1400. And, including other debts it shouldn’t exceed $1800.

Bottom Line

Buying a house is something that you don’t do every day. It is important to determine how much house you can afford. Ways such as the 28/36 rule, calculation of the down payment, evaluation of your financial standing, and more can help you identify the best house for yourself.

Frequently Asked Questions (FAQs)

1. What house can you afford with a $ 100,000 salary?

You can afford a home between $300K to $400K if your annual salary is $100K assuming your Debt-to-Income ratio and creditworthiness are favourable.

2. What credit score is needed to buy a $300K house?

You need a FICO score of at least 580 with a 3.5% down payment to get an FHA loan. This means you have to pay $10,500 as the minimum down payment for a $300K house.

3. How Much Money Do I Need to Make to Afford a 500K House?

As per the 28/36 rule, you will at least have to make $14,200 (including taxes and insurance) every month to afford a $500K house.

4. What are the Upfront Costs of Buying a House?

The upfront costs of buying a house include a down payment and closing costs like appraisal, real-estate attorney fees, and more.