June 10, 2021 Cody Marchant

How Much of a Home Can I Afford? Key factors that Go into Home Affordability

Shopping for a mortgage and a home is not always easy. In fact, 40% of Americans say it’s the most stressful event in their life.

To help lift some of the stress off your shoulders, you can begin your search by determining how much home you can afford. That involves knowing the key factors that affect affordability, plus some things that you can do to help your situation.

How Much of a Mortgage Payment Can I Afford?

Lenders calculate your mortgage rate based on monthly factors like your income and debts, plus other items like down payment amount and how risky they think it will be to lend you money.

To calculate how much house you can afford, use our mortgage calculator to analyze and understand your monthly payments.

As a home buyer, it’s important to understand as much as possible about your monthly mortgage payment. While your expenses and income may remain consistent, there are still unplanned and unexpected items that can affect your situation.

Key Factors that Go into Home Affordability 

To ensure you can afford your monthly mortgage payments, there are a few factors that will determine how much house you can afford.

1. Credit Score

If you’re applying for a mortgage, the minimum credit score depends on the type of mortgage you’re trying to obtain. For example, the minimum FICO score to obtain a conventional loan is 620, an FHA loan with 3.5% down is only 580, and a VA loan approximately 620. These numbers vary depending on your lender.

To know how your credit score will affect your mortgage, get prequalified or preapproved. Getting pre-qualified and pre-approved are the first steps in the homebuying process.

Checking your credit scores regularly will help you see what’s impacting your score so you know where you could improve.

2. Debt-to-income ratio

Debt-to-income ratio compares your monthly debt to your monthly income, and it’s an indicator of your financial health. This number provides insight to lenders into your ability to pay off debts in the future. This important data helps them evaluate how comfortable they are allowing you to take on new debt.

Some lenders will use the 43% rule, which means that if your mortgage payments and other debts exceed 43% of your monthly income then you will not qualify for a mortgage. However, most lenders prefer to see a debt-to-income ratio smaller than 36% with not more of your debt being 28%.

3. Down payment 

If you want to avoid paying PMI then you will need to put down at least 20%. Most homeowners pay private mortgage insurance until they have 20% equity in their home and pay the standard 3 – 5% of the mortgage. The larger your down payment, the less risk you are to a lender – which means lower interest rates.

mortgage loans - how they affect home affordability

Does the Type of Loan Affect How Much You Can Afford? 

Different types of loans can affect how much your down payment and monthly payment will be. 

Affording a Home with an FHA Loan

FHA loans are best for buyers that have low credit and smaller down payments. If your credit score is at least 580, you’ll qualify with a down payment as low as 3.5%. If your credit scores are between 500 and 579, you may qualify with a 10% down payment.

To get a personalized look at how much house you can afford with an FHA loan, check out our mortgage calculator.

Affording a Home with a VA Loan

If you’re an active service member, veteran, or surviving spouse, you may be eligible for a VA loan that requires no down payment. Use this VA Home Loan affordability calculator, which is currently based on the 2021 VA loan qualifying requirements and includes items like debt-to-income ratio and your mortgage rate.

How to Get the Best Rate on your Mortgage 

Having the knowledge of how to get the best rate on your mortgage could potentially save you thousands of dollars a year. Start checking your credit score and ensure it’s at its best. Then decide on a down payment and use our mortgage calculator to get an estimate on a monthly payment.

We’ve partnered with Guaranteed Rate so all Loan Compass users pay NO LENDER FEEs and receive PREFERRED RATES, saving our users thousands of dollars! 

Click here to receive a free no-obligation mortgage quote. 

For more information on how to get the best rates on your mortgage, check out our Ultimate Guide to Shopping for a Mortgage.