Home Affordability Calculator
How much can you afford?
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Calculator - How Much Can I Afford?
Are you dreaming of buying a home and wondering how much you’ll pay upfront? You are not alone. Most prospective buyers often wonder how much it costs to buy a home and if it is indeed affordable.
There isn’t a straightforward answer because many factors come into play. They include your income, down payment, and other outstanding debts. Despite this, you should only settle for the best price that meets your needs.
We have a home affordability calculator that will make your work easy. It examines key aspects of your finances and tells you how much you will spend on your dream home.
How the Home Affordability Calculator Works
The home affordability calculator determines an optimum purchase price in seconds. It only requires your income, total monthly debts, and upfront down payment. Based on the figures you provide and a set of lending rules, sit back and watch the calculator give you an estimated price.
To begin, click “Advanced” on the main menu. It will show other options, including debt-to-income ratio (DTI). Your DTI is a unique figure that shows how much debt you owe other lenders.
If you wish to increase your chances of getting a mortgage, consider reducing your DTI from the default of 41% to 36% or below. Thus, you will have sufficient funds left every month to cover additional expenses after mortgage deductions.
Once you determine your DTI, click on the “Get Started” Button for a customized analysis that matches your financial state.
Mortgage Affordability Calculator
Are you ready to buy a home? The first step is to figure out how much you can afford. There are various financing options, including personal savings.
If personal savings are insufficient, you may reach out to credit unions, mortgage financiers, and banks.
You can — and should — get pre-approved to determine how much a lender may be willing to let you borrow.
A mortgage pre-approval involves signing up paperwork that includes your credit scores. Generally, mortgage financiers will limit your mortgage repayment to not more than 30% of your monthly gross income.
Mortgage affordability is about how much you’re eligible to borrow and comfortable based on your budget.
Before you visit a mortgage financier, our mortgage affordability calculator can help you run the numbers and estimate how much you’ll want to spend on a home.
What Factors Determine How Much You Can Afford?
An important step of the home buying process is determining how much you can afford.
A general rule of thumb is the (28/36)% rule. It states that home-related costs should not exceed 28% of your monthly gross income. Similarly, your total debts should not exceed 36% of your income.
Several variables will affect your home buying ability, namely;
Will you have any savings left after your mortgage payment? That’s what mortgage lenders ask. They want to be sure you have enough steady income to make your monthly payment and have a surplus too.
They want to see two years of employment history (higher education counts if you’re a recent graduate), and they will look at your annual income during that period.
Stability is key, so if lenders see significant swings in your income, they may ask for further documentation or a letter of explanation.
Your income level may also affect your choice of loan programs. For instance, The USDA program, is only available to borrowers who earn 115% or less than their area’s median income. Some conventional loan programs also have income limits.
If you are a W2 employee of a company, you can prove your income via your employment contract, payslip, and copies of tax returns. If you are self-employed, financial lenders may ask for personal and business tax returns, bank statements, and profit and loss statements.
You can also qualify using Social Security income, disability benefits, alimony, and child support. Your lender will tell you which documents you need to submit to verify your income.
A mortgage comes with significant upfront costs in the form of a down payment.
The bigger the amount you wish to borrow, the more down payment you should have for your dream home. Therefore, down payments have a direct impact on your mortgage affordability.
Here is a breakdown of a down payment for a home worth $300,000 with a 30-year mortgage:
|Monthly Principal + Interest Due **
** The monthly payments shown here do not include additional fees such as homeowners insurance, property taxes, or PMI on conventional loans. Payments are for example purposes only. Not based on currently available rates. With 20% or more down on a conventional loan, you wouldn’t pay any PMI.
A large down payment also guarantees a lower interest rate. That’s because when you pay more upfront, the mortgage financier considers you a low-risk borrower.
Lenders, therefore, encourage borrowers to pay larger down payments by rewarding them with low-interest rates.
Fortunately, the down payment doesn’t only come from your savings. Down payment gift cards now make it easier to buy your dream home at lower rates. Mortgage financiers can allow cash gifts from friends and family members to help cut down on your monthly payment.
However, before using gift cash, be sure to document your gift properly to avoid rejection by the lender. You should write an official gift letter stating the amount, the donor’s information, and a letter certifying that the gift is not a loan in disguise.
Some loan programs that allow gift funds for a down payment include conventional loans, USDA loans, VA loans, FHA loans, and jumbo loans.
Debt to Income Ratio
As previously mentioned, lenders scrutinize your debt-to-income ratio when applying for a loan. Based on your DTI, they can determine how much of your monthly income goes to debts and how much you’ll put toward your loan repayment.
Here’s how to calculate your DTI:
Add up your minimum monthly installments for your credit card payments, car loans, student loans, personal loans, and any other debts (Don’t include your utility payments, grocery bill, or rent.)
Divide your debts by your gross monthly income (your income before taxes)
- That’s your DTI.
For example, someone who earns $5,000 a month and pays $2,000 a month toward debts has a DTI of 40%.
DTI determines your eligibility for a loan program. A conventional loan requires a DTI not exceeding 45%, whereas FHA loans require a DTI of 50% or more. However, as a general rule, a DTI exceeding 43% reduces your chances of getting a mortgage.
Your mortgage loan’s repayment period refers to the number of years your financier sets for you to clear the loan. Common repayment periods include 30, 25, 20, 15, and 10 years.
Here’s a look at the loan repayment period for a house worth $300,000 with a down payment of 5%:
|Principal + Interest Payment ***
|Total Interest Paid Over the Life of the Loan
*** The monthly payments shown here do not include additional fees such as homeowners insurance, property taxes, or PMI on conventional loans. Payments are for example for purposes only. Not based on currently available rates.
From the breakdown, a longer loan repayment lowers the monthly payment, thus allowing you to fit a more expensive home into your monthly budget.
However, rolling out the debt over 30 years means you’ll pay more interest. Similarly, a shorter repayment period comes with lower interest rates. Thus, you could save more on the interest rates.
You may also opt to start with a longer repayment period and switch to a shorter-term as your income increases. You’ll only pay the closing costs on your new terms to ensure the new payment is affordable.
The amount of money you pay every year is expressed as a percentage of your principal amount. For example, a $100,000 loan attracts an interest of $4,000 per year at a rate of 4%.
Your mortgage’s interest rate can affect how much home you can afford. Even if the home has a higher price, a lower interest rate will attract a lower monthly payment. Additionally, the lower the interest rate, the more affordable the mortgage.
A lower interest rate also opens the doors of more expensive homes, since your financier may allow you to borrow a higher loan amount.
Once again, we look at the $300,000 home with a 5% down payment and a 30-year loan term. We want to examine the effect of interest rates on the cost of the home. Each row represents a 50% increase in the interest rate:
|Total Interest Paid Over the Life of the Loan
The monthly payments shown here do not include additional homeowners insurance, property taxes, or PMI on conventional loans. Payments are, for example, for purposes only. Not based on currently available rates. With 20% or more down on a conventional loan, you wouldn’t pay any PMI.
From the table, a 2% increase in interest rate adds more than $300 to the house payment and about $120,000 to the total cost over 30 years.
How to Get a Better Mortgage Interest Rate
A common question you may ask as a mortgage beneficiary is, “do I have control over the interest rate?”
Well, market conditions greatly determine the interest rate you’ll get. But you still have some influence over the actual rate you get for your mortgage. Certainly, your financial profile comes into great play here.
Here’s how you can get a better mortgage rate:
Improve Your Credit Score
Your credit score measures how responsible you are in managing your finances. Lenders will look at your credit history, including prompt payment of debts and any outstanding loans.
You may earn a credit score that allows or hinders you from getting a mortgage. For instance, conventional loans may require a minimum score of 620, while FHA loans may require a credit score as low as 580.
If you wish to increase your credit score, pay your existing loans consistently, making on-time payments on other debts.
Before applying for a mortgage, consider obtaining a copy of your credit history and score from an accredited financial consultant.
Lower Your DTI
Having more debt from credit cards, car loans, or student loans, reduces your chances of qualifying for a mortgage.
A low DTI, on the other hand, represents less risk to your lender and may qualify you for better rates.
Pick a Shorter Loan Repayment
Shorter terms such as a 15-year mortgage tend to offer lower rates than longer terms. But do this only if you can afford the higher principal and interest payment that comes from a shorter-term loan.
Make a Bigger Down Payment
The more you can put down, the better your chances of accessing lower rates. The down payment plays an essential role in offsetting the total loan cost.
Get the Right Loan Type
What loan type do you prefer? Selecting the right type of loan helps you cut down on your interest rate. For example, FHA loans work well for credit-challenged homebuyers, and they tend to have low rates because they’re government-backed.
But if you have a stellar credit profile, a conventional loan could be your best bet with a competitive rate and the other benefits of conventional loans.
Buy Discount Points
Discount points allow you to cut down on interest rates by paying cash upfront for a lower rate on your loan. A discount point typically costs 1% of your loan amount and gives you a 0.25% discount off the current rate.
Your Budget and Long-term Goals
Buying a house is a great step with long-term benefits. But it’s also important to factor in other expenses and priorities.
The mortgage financier will issue a pre-approval, showing the maximum amount you can borrow. But you are not under obligation to sign up for the whole amount.
If you take the maximum amount, will you have money left for savings? Therefore, you may borrow less to have extra money left for monthly investments, travel plans, family vacations, and other costs.
The mortgage calculator can help you see different scenarios and compare them to what you want your housing budget to be.
Other Factors That Affect Mortgage Affordability
Your principal and interest will make up the bulk of the monthly payment on your new home. But there are several other variables as well.
Mortgage financiers require homeowners insurance before getting their loan. The insurance covers damages and losses to your property due to accidents, fire, and other disasters.
Premiums vary based on your coverage levels and where you live. For instance, if you live where crime occurs frequently, you may pay higher costs.
Generally, expect to pay $600-$1,500 a year. That’s about $50-$125 a month added to your mortgage payment
The Census Bureau estimates the average homeowner pays about $2,500 a year in property taxes. The property taxes also vary up or down based on where you live. The national tax rate varies from 0.30% to 2.13% of your property’s assessed value. If you pay $2,500 a year for property tax, it adds more than $200 to your monthly payment.
Mortgage insurance rates depend on your loan type, down payment, and credit score.
A loan with a low or no down payment attracts higher mortgage insurance. For example, conventional loans with less than 20% down payment have a private mortgage insurance (PMI) requirement.
Similarly, the loan type determines how much you’ll pay for mortgage insurance. FHA and USDA loans have an upfront payment and annual mortgage insurance premiums. However, VA loans do not have annual mortgage insurance.
Generally, your private mortgage rate will be lower if you pay a higher upfront cost and have a good credit score.
Homeowners Association Fee
As a homeowner, you will subscribe for membership into the homeowners association. The homeowners’ fee depends on amenities and services available within your community. Check your local area listings to determine how much you’ll pay for a condo or town home of your choice. The fee ranges from $200-$300 per month.
Your Monthly Mortgage Payment Explained
When you close on your home loan and make your first monthly mortgage payment, you’ll be paying for several things all at once.
Here’s a quick breakdown of the anatomy of your monthly mortgage payment:
It is the amount of money you borrow from your financier to buy a home. For example, if you borrow $300,000, your mortgage principal is $300,000. When you pay $50,000, your outstanding mortgage principal becomes $250,000.
Interest is the cost of borrowing, calculated as an annual percentage of your principal. Depending on the agreement between the lender and the buyer, it may be a fixed or variable rate. The total interest paid upon completion of the loan is always higher than the principal amount.
As a prospective buyer, there is no guarantee that you’ll amass thousands of dollars all at once to pay insurance premiums and property taxes annually. So, mortgage loan providers collect these fees gradually by adding them to your mortgage payment.
You’ll still make one mortgage payment, but your loan provider will divert part of each payment into an escrow account to cushion you against cash crunches.
After a time, the escrow account grows. When a big annual tax or insurance bill comes due, the lender pays it from your escrow account.
How Much House Can You Afford With Different Types of Loans?
There are different types of mortgage loans available for all lenders. But finding the best mortgage type is key to optimizing how much house you can afford.
If you are wondering what mortgage suits your needs, here is a primer on the most common types of loans and what each can afford:
Conventional mortgages have no insurance cover from federal governments. Some conform to the loan amounts prescribed by the Federal Housing Finance Agency, while others do not.
Unlike other mortgages, they have lower borrowing costs even at high-interest rates. Conventional loans are suitable for buying primary homes or investment property.
Conventional loans can be a great option if you have a credit score of 620 or higher and a DTI of 45% or less.
Additionally, there is no upfront mortgage insurance fee on a conventional loan, and the annual requirement falls off once you have 20% equity in the home.
It is your best choice if you have a good credit history, a stable income, and at least 3% down payment.
The US government helps borrowers who cannot afford large down payments acquire homes through government-backed loans.
FHA loans are government-backed, and borrowers with credit scores of 580 or higher can qualify with 3.5% down payment. However, you still qualify for a loan with a credit score of 500 and a 10% down payment.
If you opt for an FHA loan, you will owe 1.75% of the loan amount an upfront mortgage insurance premium. The annual MIP rate depends on your down payment and the size of your loan. But most FHA borrowers pay 0.85% for the life of the loan.
You can refinance to a conventional loan with no PMI once you reach 20% equity.
The US Department of Agriculture insures home loans for low- and moderate-income home buyers in rural and suburban areas. You can get a loan without a down payment and with mortgage insurance that’s more affordable than the FHA’s.
But you’d need a credit score of about 640 or higher to qualify, and you’d need to earn less than 115% of your area’s median income.
Active-duty service members, veterans, and surviving spouses may qualify for 0% down VA loans. Borrowers with full entitlement can buy with no money down and no loan limits. There are no ongoing mortgage insurance premiums, though there is an upfront funding fee to offset the loan cost to taxpayers.
However, borrowers with service-related disabilities may be exempt from the funding fee.
Tips to Increase How Much House You Can Afford
If you use the home affordability calculator, and you’re not happy about the results, you can still boost your affordability using the tips below:
Pay your debts promptly - Less debt shows mortgage financiers you can afford more
Build extra savings - Having sufficient cash for a bigger down payment boosts your negotiating power
Manage your bills - A history of on-time debt payments and low credit balances can raise your credit score
Ask for an increment - Talk to your employer about a possible salary increment. A higher earning makes more room in your budget for the home buying
Start a side hustle - A part-time job or a side hustle can spark more savings and help you pay down debt faster
Reduce your monthly expenses - Stick to a budget that will help your savings. You’ll need savings for your down payment and closing costs and repairs and maintenance once you buy a home
- Compare various lenders - Compare lending rates from at least three different financiers; you may land the best offer
Mortgage Affordability Calculator Definitions
Annual Income - The total amount of money you make every year before tax and debt deduction.
Down payment - The amount of money you put down on home payment before acquiring a mortgage. The more you pay upfront, the lower your payment will be.
Monthly Debts - Debt payments for credit cards, student loans, auto loans, and other personal debt. It does not include utilities, rent, and groceries.
HOA Dues - If your home is in a homeowner’s association, you will probably have to pay HOA dues, which go toward upkeep and maintenance of common areas. HOA dues can apply to condos and single-family homes within a planned unit development or PUD.
Private mortgage insurance (PMI) - This is insurance that your lender requires when you put down less than 20%. To eliminate this fee, increase your down payment amount until you’ve reached 20% of the calculator’s suggested home price.
Mortgage Affordability: How Much Can You Afford?
Are you wondering how much house you can afford?
Thanks to MakeFloridaYourHome, buying your dream home is now easy. Our mortgage affordability calculator helps you determine how much you can afford from different mortgage financiers.
Enter your annual income, debts, and preferred upfront payment and sit back as we do the calculation for you. Do not hesitate to contact us for other customized services such as loan pre-approval.
Phil and the team were very personable and great to work with. They were very familiar with my financing option (non-conventional) and I always felt prepared for the next step in the process.