Home Affordability Calculator

Use Money Under 30’s home affordability calculator to find out how much home you can afford.

Your home is one of the largest purchases of your lifetime. The ensuing mortgage, taxes, and maintenance expenses will impact your finances for the next 15-30 years. It’s critical to choose a home you can afford. Our home affordability calculator will help you see if your target house fits your budget:

The Home Affordability Calculator uses two specific guidelines to determine how much house you can afford, based on common underwriting criteria that mortgage lenders use, as well as how much you earn and owe.

1. Your total mortgage payment should be no more than 28% of your gross monthly income.
2. Your total debt payments (existing, plus the new mortgage) should be no more than 40% of your gross monthly income.

Read more: How Much House Can You Afford?

To use Money Under 30’s Home Affordability Calculator, you’ll need five pieces of information. Your future mortgage lender will also request these details to determine your eligibility.

Monthly Income

Typically, banks approve prospective borrowers for a monthly mortgage payment that’s around 35% of their gross, pre-tax monthly income. However, Money Under 30’s Home Affordability Calculator is a bit more conservative. Instead, the calculator sets a mortgage payment limit of 28% of your monthly income, to account for additional housing expenses and other surprise costs.

When you input your pre-tax income into the calculator, be sure to include all income sources. This includes not only your own salary, but also any shared income with a partner, any significant income sources outside your salary, etc.

Monthly Debt Payments

Another number the Home Affordability Calculator considers is how much money you pay every month for debts. Your debt-to-income ratio (DTI ratio) should be less than 40%. Total debts include auto loans, student loans, credit card debt, and so on, but it should also include your mortgage payment. This is an important number to mortgage lenders, and some may require that you reduce your debts owed before they approve you for a loan.

Interest Rate

The Home Affordability Calculator also considers mortgage details like your interest rate to determine how much house you can afford. Your interest rate is dependent on several factors that are unique to you, such as your credit score, monthly income, and debts.

Mortgage rates fluctuate with time, but in the last couple decades they’ve hovered between 3% and 8%. Or take a look below and see some of the best rates offered in your area.

Down Payment

Your down payment is the percentage of a home’s price that you pay at the time of purchase, and it impacts the amount of money you’ll owe on your mortgage monthly and over the life of the loan.

A down payment amount is typically between 3% and 20%, depending on the type of mortgage you get. A conventional loan, for example, often requires a 20% down payment, but an FHA loan only demands 3.5%. The more money you put down, the less risky you’ll seem to lenders, and the better the interest rate they’ll offer you.

How much money you pay towards the loan up front will also determine whether or not your loan includes private mortgage insurance (PMI). PMI is usually required for down payments under 20%, to protect the lender against potential financial losses.

Length of Loan

Finally, the last piece of information needed for the Home Affordability Calculator is the length of your loan. Most mortgages last either 15 years or 30 years, and each option has its pros and cons.

For a 15-year loan, you’ll finish paying off the mortgage in half the time, and you’ll owe significantly less in interest over the life of the loan. The catch, however, is you’ll pay a hefty chunk of change for monthly payments.

For a 30-year loan, you’ll have smaller monthly payments, but they last 30 years, and you’ll have paid much more in interest by the end of those three decades.

Read more: 15-Year vs. 30-Year Mortgages — How to Choose

It’s easy to look at a potential monthly mortgage payment and say, “I can cover that.” But, the reality is there’s a lot more to think through when you’re preparing to buy a home.

Of course you want to make sure you have enough income to make your monthly payments, but what about future expenses? Your house will not only cost a lot of money every month, it’ll cost a lot of money for a long period of time. What happens when you want to send your kids to college? What if your parents need additional care as they age?

There’s also your savings to consider. How much of your savings can you allocate toward your down payment without leaving yourself in a financially vulnerable position?

Lenders certainly have their own set of qualifications for prospective borrowers, but they’re not responsible for your personal, long-term financial health, and they might be willing to lend you more than you should actually take out.

You and you alone must consider your financial circumstances, now and in the future, to determine the loan value and terms that work for you. But our calculator errs on the side of caution, and it’s a good start to your search for the perfect property

For some, the Home Affordability Calculator will reveal you’re not prepared to purchase the size and type of home you’d prefer. If that’s the case, there are several ways to improve your financial health and increase the home price you can afford.

Increase Income

Since lenders typically approve borrowers for a mortgage payment that requires no more than 35% of the borrower’s monthly income, one surefire way to afford a more expensive home is to make more money.

Think about your current career and its trajectory. Can you expect recurring pay raises? Are you anticipating a promotion in the near future? A mortgage is a years-long financial commitment, so it’s important to consider your long-term income prospects and whether or not they will comfortably support the mortgage size you want.

If you’re concerned that your income won’t be high enough to realize your dreams of homeownership, take some steps that can help you close that aspiration gap:

• Negotiate for a higher salary.
• Try out a side hustle.
• Further your education.

Reduce Debt

A mortgage is likely the largest debt you’ll ever take on in life, so lenders want to make sure you’re prepared to handle it.

If you’re still whittling down student loans or a car payment each month, do what you can to eliminate those debts before pursuing a home loan. This will not only make you a more attractive borrower to lenders, but it’ll also provide you with more income to afford a larger mortgage payment. In other words, the less debt you have, the more house you can afford.

Improve Your Credit Score

Lenders view your credit score as an indicator of how likely you are to repay your loan — or how likely you are to default. Consequently, it affects both the interest rate and the loan amount a lender is willing to offer you.

By taking concrete steps to improve your credit score, you’ll show lenders that you are a trustworthy borrower, and they’ll reward you with a reasonable rate and, hopefully, a large enough mortgage to afford the home of your dreams.

Once you have a basic idea of how much home you can afford, here’s how to keep your house hunting process moving forward.

Review your credit report. According to Rocket Mortgage, most home loans require a credit score of 620 or greater. How high or low your credit score is will also affect the interest rate you receive. Before you lock yourself into a 15 or 30-year mortgage, check out your credit report so that you can pursue the mortgage options best suited to your applicant profile. For instance, you might consider an FHA loan instead of a conventional mortgage, or perhaps apply with a co-signer to boost your credibility.

Pursue mortgage pre-approval. Next, you should consider getting mortgage preapproval, which can give you the financial confidence you need to make a strong offer on the right house. Preapproval is free and helps you determine the home value and interest rate you are eligible for.

MORE: Mortgage Preapproval Calculator

Establish an emergency fund. Even if you find a home that requires a monthly payment less than 28% of your income and keeps your collective debts below 40% of your income, unexpected expenses can and will happen. Make sure you’ve saved at least three months of mortgage payments to prepare for any financial surprises down the road.

Summary

Money Under 30’s Home Affordability Calculator considers a number of details, such as your debt-to-income ratio and mortgage interest rate, to provide you with a suggested home price that you can realistically and safely afford. If the value is lower than you anticipate, you can take steps such as reducing your debts and increasing your income to afford a higher-priced home.

If, on the other hand, you feel ready to continue your house hunt, you can further prepare yourself for owning a home by checking your credit report, establishing an emergency fund, and pursuing mortgage preapproval.