Key Factors That Determine Affordability

• Gross Monthly Income: Your total pre-tax household earnings form the baseline for all affordability calculations
• Existing Debt Obligations: Current loans, credit card payments, car loans, and other recurring debts directly impact borrowing capacity
• Down Payment Amount: A larger down payment reduces loan principal and improves affordability
• Credit Score: Higher scores unlock better interest rates and more favorable loan terms
• Interest Rate: Even small rate differences significantly impact monthly payments and total loan cost
• Loan Term: Longer terms (30 years) mean lower monthly payments but higher total interest paid

Step-by-Step: Calculate Your Maximum Loan Amount

1. Calculate Monthly Income: Add up all sources of stable income (salary, bonuses, rental income, etc.)
2. List Existing Debts: Total all monthly debt obligations (car payments, student loans, credit cards)
3. Apply 28/36 Rule: Calculate maximum housing payment (28% of income) and ensure total debts stay under 36%
4. Factor in Interest Rate: Current market rates directly affect how much principal you can borrow
5. Consider Down Payment: Your available down payment determines the final home price you can afford

Monthly Mortgage Payment Formula

Practical Example Calculation

Let's calculate the monthly payment for a $300,000 mortgage at 6.5% annual interest for 30 years:

• • P (Principal) = $300,000
• • r (Monthly rate) = 6.5% ÷ 12 = 0.00542
• • n (Total payments) = 30 years × 12 = 360 months

• Make Bi-Weekly Payments: Split monthly payment in half and pay every two weeks (equals 13 monthly payments per year)
• Round Up Payments: Pay extra $50-$200 monthly toward principal to reduce loan term significantly
• Apply Windfalls: Direct bonuses, tax refunds, or raises toward mortgage principal
• Refinance When Rates Drop: Lower interest rates can reduce payments or shorten loan term

What percentage of income should go toward housing?

The standard recommendation is no more than 28% of your gross monthly income for housing expenses. This includes mortgage principal and interest, property taxes, homeowners insurance, and HOA fees. Staying within this limit helps ensure you have sufficient funds for other expenses and savings goals.

How does my credit score affect how much I can borrow?

Your credit score significantly impacts both loan approval and interest rates. Higher scores (740+) typically qualify for the best rates, potentially saving tens of thousands over the loan term. Lower scores may require larger down payments or result in higher interest rates, reducing the amount you can afford to borrow while maintaining the same monthly payment.

Should I get pre-approved before house hunting?

Yes, absolutely. Mortgage pre-approval gives you a clear budget range, strengthens your offers in competitive markets, and identifies any credit issues to address beforehand. Pre-approval involves a thorough financial review and provides a conditional commitment from a lender, making you a more credible buyer in sellers' eyes.

What's the minimum down payment I need?

Minimum down payments vary by loan type. Conventional loans typically require 3-5% for first-time buyers and 10-20% for others. FHA loans accept as little as 3.5%, while VA loans offer 0% down for eligible veterans. However, putting down at least 20% helps you avoid private mortgage insurance (PMI) and secures better interest rates.

Can I afford a house with student loan debt?

Yes, but student loans impact your debt-to-income ratio and reduce borrowing capacity. Lenders include student loan payments in the 36% back-end ratio calculation. To improve affordability, consider paying down student debt, increasing your income, or looking at income-driven repayment plans that may lower your monthly obligations and improve your DTI ratio.