How Much Mortgage Can I Afford?

Home affordability is determined by a few key factors, including your income and debts. Start by calculating what you (and your co-borrower, if applicable) earn each month. Then add in your monthly debt payments, such as credit card and car loans.

A good rule of thumb is that your total debt payments should be less than 36% of your income.

Debt-to-Income Ratio (DTI)

The DTI is a key piece of information lenders use to decide whether to grant you a loan. It is calculated by adding your projected mortgage payment, plus any other monthly debt payments you have (including credit card bills), and dividing that total by your gross monthly income before taxes. A low DTI number is desirable because it shows that you have enough income left over to afford your new loan payments.

A high DTI could worry lenders, because it suggests that you have too much debt and might be at risk for defaulting on your loan payments if your mortgage payments are added to the mix. Lenders set their own DTI limits, but most aim for a DTI ratio below 43%. They also often divide DTI into front-end and back-end ratios, with the former calculating your housing expenses—including your mortgage payment, homeowner’s insurance and property taxes—and the latter including all of your debt payments.

Down Payment

Most mortgage lenders require homebuyers to make a down payment, which is an upfront cash payment that reduces the amount you need to borrow. The size of the down payment depends on a number of factors, including local real estate prices, financial situation and goals. For example, a 20% down payment on a $250,000 home would be $45,540.

The size of the down payment also affects your loan options, since lenders view buyers who put down more upfront as less risky. That can lead to lower interest rates, saving you money both on a monthly basis and over the life of the mortgage.

When determining the size of your down payment, you should take a holistic look at your budget and savings, as well as consult with a trusted mortgage professional. You may also want to consider closing costs, which can add up to 3% or more of the purchase price. These expenses can be financed through your mortgage or paid out of pocket.

Mortgage Rates

Mortgage rates can fluctuate daily, based on the overall market and larger economic trends. As a result, it’s important to shop around for the best mortgage rates. Even a fraction of a percent can make a big difference in the amount you’ll pay over the life of your loan.

Lenders typically offer the lowest interest rates to borrowers with the strongest credit scores and largest down payments. Having the opportunity to buy a home with a lower rate could save you thousands of dollars over the course of your loan.

Some lenders also charge borrower-paid “discount points.” These upfront fees reduce your mortgage’s interest rate by one-eighth to one-quarter of a percentage point. Enter different home prices and down payment amounts into the Explore Interest Rates tool to see how this affects your monthly payment and the amount of interest you’ll pay over time. Then, consider whether or not these fees are worth it for you.

Closing Costs

Closing costs are charges for services associated with finalizing a mortgage loan. These fees can be a large part of your overall costs when buying a home, making it important to know how much you’ll pay. The exact closing costs you’ll pay will vary by lender, where you live and the type of mortgage loan you take. Closing costs can include fees like home appraisal and searches on property title, as well as a variety of other fees for processing and underwriting the mortgage.

Some lenders allow you to roll your closing costs into the loan, which can reduce your out-of-pocket expenses at mortgage signing. However, be aware that doing so will increase your total loan amount and monthly payments. Ask lenders to provide a breakdown of all closing costs and fees so you can make the best decision about which loan is right for you. Also, be sure to pre-qualify for a mortgage, which allows you to gauge what you may be approved for without impacting your credit score.