How we calculate how much house you can afford

Our home affordability calculator estimates how much home you can afford by considering where you live, what your annual income is, how much you have saved for a down payment, and what your monthly debts or spending looks like. This estimate will give you a brief overview of what you can afford when considering buying a house.

Go one step further by applying some of the advanced filters for a more precise picture of what you can afford for a future residence by including the costs associated with homeownership. The advanced options include things like monthly homeowners insurance, mortgage interest rate, private mortgage insurance (when applicable), loan type, and the property tax rate. The more variables you enter into the home affordability calculator will result in a closer approximation of how much house you can afford.

How to calculate annual income for your household
In order to determine how much mortgage you can afford to pay each month, start by looking at how much you earn each year before taxes. Consider all your earnings for the year, which could include salary, wages, tips, commission, etc.

If you have a spouse or a partner that has an income which will also contribute to the monthly mortgage, make sure to include that as well into your gross annual income for your household. Then take your annual income and divide by 12 to determine your monthly income.

Follow the 45/45 debt-to-income rule

This rule asserts that you do not want to spend more than 45% of your monthly income on housing-related expenses and not spend more than 45% of your income against all debts, including your new mortgage. Keeping within these parameters will ensure you have enough money left over for food, gas, vacations, and saving for retirement.


Your down payment effectively reduces the total amount of your home loan, which increases your home affordability estimate, and at the same time, decreases your mortgage payment each month. Use the affordability calculator to see how your down payment affects your home affordability estimate and your monthly mortgage payment.

Create your list of monthly expenses

Lenders calculate how much they will lend you to buy a home based on your monthly income minus any fixed, recurring expenses you're obligated to pay. Once you have your monthly expenses written down into a list, you can more accurately determine how much money you have left to spend on a monthly mortgage.

You should include expenses such as the following:
Student loans
Car loans
Credit card debt payments
Alimony
Child support
Lenders don't include living expenses as part of this calculation. When adding up your monthly debts, you should not include costs such as:
Utilities
Transportation costs
Gas
Electricity
Groceries
Child care
Car insurance
Life insurance
Health insurance
Cable bills
Telephone bills

List out your expenses and then add them together to get your total monthly spending.

What are the different types of home loans?

There are several types of home loans, but which one is right for you will depend entirely on what you qualify for and what ultimately makes the most sense for your financial situation. Below are the five most common home loans you will encounter.
Fixed-Rate Loan

Fixed-rate loans have the same interest rate for the entire duration of the loan. That means your monthly home payment will be the same, even for long-term loans, such as 30-year fixed-rate mortgages. Two benefits to this mortgage loan type are stability and being able to calculate your total interest on your home upfront.

Adjustable-Rate Loan

Adjustable-rate mortgages (ARMs) have interest rates that can change over time. Typically, they start out at a lower interest rate than a fixed-rate loan and hold that rate for a set number of years before changing interest rates from year to year. For example, if you have a 5/1 ARM, you will have the same interest rate for the first 5 years, and then your mortgage interest rate will change from year to year. The main benefit of an adjustable-rate loan is starting off with a lower interest rate to improve affordability.

FHA Loan
Most home loans require a 20% down payment, but Federal Housing Administration (FHA) loans only require a minimum of 3.5%. This type of loan opens the door for many potential homeowners that do not have the savings for a substantial down payment. However, this loan typically requires private mortgage insurance (PMI) which should be added into your monthly expenditures. PMI is usually .05-1% of the cost of the home loan but may vary depending on credit score.

USDA Loan
This loan type is specifically designed for families looking to buy homes in rural areas. Similar to the FHA loan, this home loan lets lower-income families become homeowners. The loan does not require a down payment, but you will have to get private mortgage insurance.

VA Loan
This loan is a great option for anyone who is a veteran or currently serving in the United States military. The loan does not require any down payment, and unlike other loans, it also does not require private mortgage insurance.

How loan term and interest rates impact your mortgage

The monthly amount of your mortgage payment depends on loan term (duration) and interest rate. Generally, a longer-term loan will have lower monthly payments, but at a higher interest rate, so you’ll end up paying more money over the life of the loan. You can build up your credit or save for a larger down payment to help qualify for a lower interest rate. A lender can also help determine your mortgage affordability, and present the best loan term and interest rate for your home.


Why do credit scores matter?

Generally, the higher the credit score you have, the lower the interest rate you’ll qualify for and improve overall what you can afford in a home. Even lowering your interest rate by half a percent can save you thousands of dollars and increase your affordability range significantly.
What is the difference between APR vs interest rate?

Mortgage Interest Rate
The mortgage interest rate is the amount charged by a lender in exchange for loaning money to a buyer. It is expressed as a yearly percentage of the total loan amount but is calculated into the monthly mortgage payment.

Annual Percentage Rate (APR)
APR (%) is a number designed to help you evaluate the total cost of a mortgage. In addition to the interest rate, it takes into account the fees, rebates, and other costs you may encounter over the life of the loan. The APR is calculated according to federal requirements and is required by law to be stated in all home mortgage estimates. This allows you to better compare how much mortgage you can afford from different lenders and to see which is the right one for you.

What is property tax?
As a homeowner, you’ll pay property tax either twice a year or as part of your monthly home payment. This tax is a percentage of a home’s assessed value and varies by area. For example, a $500,000 home in San Francisco, taxed at a rate of 1.159%, translates to a payment of $5,795 annually.

It’s important to consider taxes when deciding how much house you can afford. When you buy a home, you will typically have to pay some property tax back to the seller, as part of closing costs. Because property tax is calculated on the home’s assessed value, the amount typically can change drastically once a home is sold, depending on how much the value of the home has increased or decreased.

How much is homeowners insurance and what does it cover?

Homeowners insurance is a combination of two types of coverage:
Property insurance: protects homeowners from a variety of potential threats such as weather-related damages, vandalism, and theft.
Liability insurance: protects homeowners from lawsuits or claims filed by third parties for accidents that happen within the home.
In 2019, the average annual cost of homeowners insurance was $1,083 nationwide. The cost of homeowners insurance policy will vary depending on the type of property being insured (e.g. condominium, mobile home, single-family residence, etc.) and the amount of coverage the owner desires. Lenders require that buyers obtain homeowners insurance in order for the insurance premium to be included in the monthly mortgage payment.

What is Private Mortgage Insurance (PMI)?

Mortgage insurance protects the mortgage lender against loss if a borrower defaults on a loan. Private mortgage insurance (PMI) is required for borrowers of conventional loans with a down payment of less than 20%.

PMI typically costs between .05% to 1% of the entire loan amount. If you buy a $200,000 house, your private mortgage insurance will cost roughly $2,000 annually or $14,000 over the course of seven years.

Deciding whether or not PMI is right for you depends on a few different factors. Although PMI raises your monthly payment, it may allow you to purchase a home sooner, which means you can begin earning equity. It’s important to speak to your lender about the terms of your PMI before making a final decision.

What is a jumbo loan?

A jumbo loan is used when the mortgage exceeds the limit for Fannie Mae and Freddie Mac, the government-sponsored enterprises that buy loans from banks. Jumbo loans can be beneficial for buyers looking to finance luxury homes or homes in areas with higher median sale prices. However, interest rates on jumbo loans are much higher because lenders don't have the assurance that Fannie or Freddie will guarantee the purchase of the loans.


Documents needed for mortgage application

Here are a few documents you should gather to help you understand your financial situation and how much house you can afford. This information will also be required when you apply for a pre-approved home loan.

Recent statements from all bank and investment accounts
Pay stubs and W-2 income tax forms
Total monthly expenses, including all bills, groceries, clothing budgets, etc.
All of your assets, including stocks, 401(k), IRAs, bonds, cash, rental properties, etc.
All debt including credit cards, student loans, car loans, mortgages, etc.
Credit score
Profit and loss statements if you are self-employed
Gift letters if you are using a gift to help with your down payment