Buying your first home is both exciting and daunting. One of the first (and most important) questions is, “How much house can I actually afford?” This guide will walk you through assessing your finances and understanding how lenders determine affordability.

1. Start with Your Budget

A good rule of thumb: keep monthly housing costs between 25-30% of your gross monthly income. This includes:

• Mortgage Payment: The bulk of your payment, covering principal and interest.
• Property Taxes: Rates vary by location; your lender will estimate these.
• Homeowners Insurance: Required by lenders; costs vary by home size, location, and value.
• HOA Fees: Some communities charge these fees for amenities and maintenance.

2. Understand Your Debt-to-Income Ratio (DTI)

Your DTI ratio affects how much you can borrow. Lenders prefer a DTI of 36% or lower for the best rates, though some go up to 43% or even 50% for qualified borrowers. Calculate it as follows:

DTI = (Total Monthly Debt Payments ÷ Gross Monthly Income) x 100

3. Factor in Your Down Payment

A larger down payment lowers monthly costs. A 20% down payment lets you avoid Private Mortgage Insurance (PMI), but some lenders accept as low as 3%. Here’s an example for a $1,000,000 home:

• 20% Down Payment: $200,000
• 10% Down Payment: $100,000
• 3% Down Payment: $30,000

4. Check Your Credit Score

Your credit score impacts your interest rate. Here’s a breakdown:

• Excellent (740+): Best rates
• Good (700-739): Competitive rates
• Fair (620-699): Slightly higher rates

5. Estimate Additional Costs of Homeownership

Beyond the mortgage, budget for:

• Utilities: Water, gas, and electricity
• Maintenance & Repairs: Plan for 1-2% of your home’s value annually
• Upgrades: Furniture, renovations, and landscaping

6. Use a Mortgage Affordability Calculator

Get a clearer picture of affordability with an online mortgage calculator. Try this one to estimate costs based on income, debt, down payment, and interest rate.

Final Thoughts

Homeownership is a personal journey. By understanding your finances, monthly expenses, and extra costs, you can set a realistic budget. Affordability isn’t just about lender approval—it’s about what you feel comfortable paying monthly. Find the balance between your dream home and financial stability.