What Size House Can I Afford? Best $1000 Mortgage Rate?

What Size House Can I Afford? Best $1000 Mortgage Rate?

The size and type of mortgage you can qualify for determines how much house you can afford. Understanding how much you can afford to spend on a new mortgage while still meeting your current obligations is critical during the home-buying process.

Continue reading to learn more about home affordability, and use our home affordability calculator to see if you can afford your dream home.

What size house can I afford?

Buying a home is a financial decision that will affect you for the next 15 to 30 years. To avoid ending up with a mortgage loan you can’t afford in the long run, be realistic about your monthly income and expected expenses.

If you’re ready to buy, check out our best mortgage lenders page to find the best lender for you.

This guide covers the following topics:

  • What size house can I afford?
  • How to Determine Your Home’s Affordability
  • Ways to Increase the Affordability of Your Home
  • The most recent COVID-19 and home affordability news

The following factors will determine how much house you can afford:

  • The amount of your loan and the length of your mortgage
  • Your monthly and annual gross earnings
  • Your total monthly debt or expenses, including credit card debt, student loan payments, car payments, child support, and other outgoings.
  • State property taxes, which vary by state and are paid annually or biannually
  • Mortgage rates and closing costs are currently variable depending on location.
  • Condominium and homeowner’s association (HOA) fees

What kind of house can I afford with an FHA loan?

Depending on your current financial situation and credit score, a Federal Housing Administration-insured loan, also known as an FHA loan, may allow you to purchase a home with fewer restrictions than a traditional mortgage.

For most applicants with a credit score of 500 or higher, FHA loans have maximum qualifying ratios of 31/43, which means that no more than 31% of your income should be allocated to housing costs, while 43% should be allocated to total debt. A 28/36 ratio is required for the majority of loans. As a result, FHA loans are ideal for those with lower incomes or a shorter credit history.

If your credit score is higher than 580, you may be able to have a ratio as high as 40/50 with this type of loan if you meet other criteria.

Borrowers with credit scores of 580 or higher may be able to pay as little as 3.5% as a down payment, which is less than the typical 5% or higher with a non-FHA loan.

With a VA loan, how much house can I afford?

While the maximum debt-to-income ratio for VA loans is set at 41% in the general guidelines, the VA will back loans for people with higher ratios if they meet other requirements. VA loans have no credit score requirements (though the borrower’s credit score will still affect the interest rate), and borrowers can qualify for a 0% down payment.

What kind of house can I afford with a USDA loan?

USDA loans for qualifying rural areas are far more flexible than traditional loans. They do not require a down payment and can incorporate the mortgage insurance fee into the loan. This means you can finance 102% of the house’s value and avoid paying this fee up front.

However, keep in mind that there are guidelines for both income eligibility (the borrower must earn a maximum of 115% of the median household income) and the price and size of the house itself. Even if you can afford a certain amount, you may be eligible for a less expensive home.

To see these requirements in greater detail, visit the USDA website and look at the qualifying areas and income by county.

How do you determine your home’s affordability?

There are several approaches to determining your home’s affordability. The simplest method is to enter your information into our above-mentioned calculator. Our home affordability calculator takes into account your debt-to-income ratio as well as your proposed housing budget.

You’ll need your gross monthly income and monthly debts for the first method, and your desired monthly payment amount for the second. Both methods will require you to provide your down payment, state, credit score, and home loan type.

Once you’ve entered all of the necessary information, our calculator will calculate the maximum amount you can pay for a house as well as your estimated monthly payment.

The rule of 28/36

Lenders may use the 28/36 rule to determine your ability to purchase a new home. According to this rule:

  • Housing costs should not exceed 28% of your total pre-tax income. This includes payments for your monthly principal and interest rate, home insurance, annual property taxes, and private mortgage insurance (PMI).
  • Total debt should not be more than 36% of total pre-tax income. This includes the previously mentioned housing expenses, as well as credit cards, car loans, personal loans, and student loans, as long as the monthly debt payments are expected to continue for at least 10 months. Other monthly expenses such as groceries, gas, and current rent payments are not included.

In concrete terms, the 28/36 rule states that a borrower earning $5,000 per month should not spend more than $1,400 per month on housing costs.

If you make $5,000 per month and rent, a good rule of thumb is to spend no more than $1,400 on rent. However, $1,400 should cover your monthly mortgage payment, as well as homeowners insurance premiums and property taxes for a homeowner earning the same amount.

Credit rating

Your credit score is a three-digit calculation that summarizes your creditworthiness. Borrowers with high credit scores typically receive the lowest interest rates, while those with low credit scores receive the highest rates.

Each of the three major credit bureaus offers a free credit report once a year. You can also get your credit report for free under certain circumstances, such as if you’ve been the victim of identity theft.

Furthermore, as a result of the CARE Act, you can now obtain free weekly reports from the three major credit bureaus until at least April 2022.

Debt-to-income proportion

The DTI compares how much you owe to how much you earn, specifically your monthly debt versus your monthly pre-tax household income. It’s a crucial metric used by lenders to determine how much you can borrow — or whether you can borrow at all.

Your DTI is calculated using debt such as credit card payments, car loans, student loans, and other loans, as well as housing expenses if you are approved for a mortgage. It excludes other monthly expenses such as groceries, gas, and your current rent.

A high DTI indicates that your debt is high in comparison to your income, and vice versa. The greater your DTI, the more difficult it will be to obtain a mortgage. In fact, many lenders will not even consider applicants with a DTI greater than 43 percent.

Lenders prefer borrowers with a DTI of 36 percent or less and will offer them lower mortgage interest rates. Use our debt-to-income ratio calculator to calculate your DTI.

Payment in advance

Most buyers, with the exception of those who qualify for a VA loan or a 0% down payment mortgage program, will be required to make a down payment on their potential home. Conventional loans typically require a 5% down payment, but it could be as little as 3% if you have a low DTI ratio, a high credit score, and meet other criteria.

The FHA loan minimum is 3.5 percent.

Buyers should ideally be able to put down 20% on their homes. This will result in:

  1. Reduce your loan-to-value ratio.
  2. Reduce your monthly payments
  3. Increase the likelihood of earning a lower interest rate.
  4. Purchase enough home equity to avoid private mortgage insurance.

If you do not have enough money for a 20% down payment, you can refinance later. If the market conditions are favorable, this can get you a better rate.

If you’d like to learn more about refinancing, visit our best mortgage refinance lenders page. Use our mortgage refinance calculator to determine your future mortgage rate after refinancing.

Ways to Increase the Affordability of Your Home

If you are unable to afford the home you want, you have several options to consider. Some methods must be implemented gradually, whereas others will have an immediate impact on your mortgage application.

Reduce your DTI

DTI is one of the most important factors that lenders look at when evaluating borrowers. If your DTI is too high to be pre-qualified for a reasonable interest rate, lowering it by paying off as much debt as possible is a good option (or to qualify at all).

An ideal DTI is 36% or less, including any potential housing costs but excluding any current rent payments, if any. If your monthly income is $5,000, you should not owe more than $1,800 per month.

If your monthly debt is around $600, your housing expenses could be $1,200. Also, if you’ve already calculated all of your house expenses and come up with a figure, say, $1,450, you should try to reduce your $600 monthly payments by $250 to improve your chances of getting a loan.

Improve your credit score

There are several methods for raising your credit score. First, check your credit report from all three bureaus — Experian, TransUnion, and Equifax — for errors. If you believe there are errors in your credit history, you can file a dispute with the credit bureaus. They are legally required to correct any errors as soon as possible.

If the data is correct, make sure to resolve any collections accounts, pay your outstanding debt on time every month, and, if possible, reduce your overall credit card debt. The lower your interest rate, the higher your credit score.

Consider applying for federal student loans.

The type of mortgage you seek will influence a lender’s willingness to consider your loan application. Loans insured by the federal government, such as FHA, VA, and USDA loans, all have advantages that may help you afford the home of your dreams.

FHA financing

The Federal Housing Administration insures FHA loans. Because banks are paid even if you default on your mortgage, they are more likely to be flexible with credit and down payment requirements. To qualify for an FHA loan, the borrower must intend to use the house as his or her primary residence and live in it within two months of closing.

Loans from the VA

Borrowers who have served in the military or have certain military connections may be eligible for a VA loan. VA loans are more forgiving than conventional loans and even FHA loans. They are backed by the Department of Veterans Affairs and do not usually require a down payment.

Qualifications differ depending on the period and length of service. However, whether you are a veteran, active duty service member, reservist, or member of the National Guard, there are numerous ways to qualify. There are also opportunities for discharged members.

Visit the U.S. Department of Veteran Affairs to learn more about the qualifications and process for obtaining a Certificate of Eligibility.

Visit our best VA loans page to learn more about your VA loan options.

USDA financing

USDA loans are backed by the United States Department of Agriculture and provide benefits that conventional loans do not.

They are intended to assist in the financing of homes in eligible rural areas. The desired property must be located within specific geographical areas, usually outside of major metropolitan areas. It must also be a primary residence at a reasonable cost.

USDA loans have many advantages if you are eligible, including the ability to build, rehabilitate, improve, or relocate a dwelling as your primary residence to your new location.

The most recent Covid-19 and home affordability news

There are a few steps between you and that white picket fence, from budgeting to loan eligibility and closing costs. Read our guide on how to buy your first home to learn about the steps you can take before embarking on this adventure: How to Purchase Your First Home.

Home prices skyrocketed during the Covid-19 pandemic; however, as they begin to stabilize, experts believe the market is on the right track. To learn more about these changes, read our article on the shifting real estate market: Home prices continue to rise, but there is some good news for buyers.

For many prospective home buyers, remote work has opened up a world of possibilities. So, if you’re looking to buy a new house anywhere in the country but aren’t sure where to begin, go to: According to Zillow, the following are the ten hottest housing markets for 2022.

FAQ on Home Affordability

  •       Based on my income, how much house can I afford?

Your salary, or gross monthly income, is one of the factors considered by lenders when determining how much house you can afford. It’s one of the most important factors to consider when looking for a new home, along with your DTI, down payment, and credit score. Use our home affordability calculator to determine how much you can afford based on your salary.

  • What salary is required to purchase a $400k home?

The amount of income required to purchase a home in a specific price range can vary greatly depending on the type of loan, location, loan term, and other factors. To afford a $400,000 house with a 3.5% interest rate from an FHA loan and a down payment of $79,400 (20%), you would need to earn approximately $60,000 per year.

  • On a 70,000-dollar salary, how much house can I afford?

You may be able to afford up to $508,000 if you have no outstanding debt, a 20% down payment, and a 3.5% interest rate from an FHA loan. However, keep in mind that this calculation only applies to a small portion of the population — the majority of people will have some kind of debt, whether it’s from a car loan, credit cards, or student loan payments.

  • How can I buy a house if my income is limited?

Those who are unable to afford a home can still purchase one, thanks to FHA, VA, and USDA loans. These loans have advantages that make them more accessible to certain segments of the population. However, not everyone is eligible for these home loans because borrowers must meet certain criteria.

  • Why is housing affordability determined before taxes?

Lenders want a precise picture of your spending ability when calculating house affordability. Because everyone’s tax deductions differ and can change after a large purchase like a house, gross income provides a more consistent baseline when evaluating a buyer’s finances.

  • Do you consider all expenses when determining house affordability?

Companies consider the debt on your credit report, such as credit cards, car loans, and student loans, when calculating your affordability. While they do not account for your daily expenses, you should consider how much you pay for utilities, groceries, and savings when determining how large a mortgage you can afford.

Bottom line on home affordability

How much house you can afford is determined primarily by two factors: your eligibility for a mortgage loan and your actual budget for paying a monthly bill, including taxes and insurance. When you’re getting ready to buy a home, keep the following steps in mind:

  • To determine your DTI, calculate your monthly debt and compare it to your gross income.
  • Consider other monthly expenses such as utilities and groceries.
  • Put money aside for a down payment.
  • Consider all loan options, including FHA and VA loans.
  • To avoid surprises, use a mortgage calculator.

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