Mortgage loan qualification is based on how much debt a lender believes you can handle. Ultimately, this will determine how much house you can afford.

Even if you qualify for a certain amount, you shouldn't buy a house that costs that much. If you want to begin your home search with a firm budget, you should take a good look at how much house you can afford.

To determine if you should buy a house and then start your search for your dream house, read on to calculate how much house you can afford.

How Much Mortgage Can You Afford?

There's a lot of excitement associated with buying a house, and it's easy to get swept up in it all. You shouldn't let your excitement overshadow your budget when buying a home. Today's tight housing market drives asking prices higher, so it's essential to have a realistic understanding of what you can afford.

Make sure you search for homes within your price range so you don't fall in love with one that's simply out of your reach. When purchasing a home, knowing your budget and sticking to it will make things easier.

How To Calculate Home Affordability Using The 29/41 Rule

A lender calculates your debt-to-income ratio (DTI) when evaluating your mortgage application. This is the difference between your monthly debt payments and your monthly gross income. It shows lenders how much debt you can take on in the future.

It's best to keep your DTI within the range defined by these two numbers, according to the 29/41 rule. The following is an example.

Your housing expense ratio is represented by the first number, 29. You calculate this by dividing your net monthly income (principal, interest, real estate taxes, homeowners insurance, and homeowners association dues, if applicable) by your monthly mortgage payment.

The formula is as follows:

Principal + Interest + Property Taxes + Insurance (Homeowners & Mortgage)

+ Homeowners Association Dues ∕

_________________________   × 100

Gross Monthly Income

A DTI over 41 represents your total debt after including all revolving and installment debt (mortgage, car payment, student loan payments, and personal loans).

Here is the equation:

Installment Debt + Revolving Debt Payments

_________________________   × 100

Gross Monthly Income

DTI plays a crucial role in determining your ability to pay your mortgage, which is why the 29/41 rule is important to know when considering your mortgage qualification. Many loan types allow higher housing expenses and DTI ratios, but the 29/41 rule is a good starting point. Consider a variety of loan options when calculating how much house you can afford.

You should not spend more than 29% of your gross monthly income on your mortgage (principal, interest, taxes, insurance, and homeowners association dues). Keep your monthly debt to no more than 41% of your total income (mortgage plus car loans, student loans, etc.).

What Is Your DTI Ratio?

DTI is considered an important qualification factor by mortgage lenders. Debt is considered an important indicator of the risks associated with mortgage loans.

Here's how DTI is calculated.

Step 1: Sum up your monthly debts

• Rent or mortgage payments every month
• A monthly child support or alimony payment
• A student's loan payment
• Payments for your car
• Minimum monthly payments on credit cards
• Your other debts

There is no need to include:

• Bills related to groceries
• Bills for utility services
• Paying taxes
• Other monthly bills that may vary

Step 2: Subtract your gross monthly income from your monthly debts

The next step is to do a simple calculation. Say, for instance, that your monthly debts amount to $2,000. Your DTI ratio is 33% if your monthly gross income (before taxes) is $6,000 monthly.

Factors Affecting Your Ability To Buy A Home

There are other factors that influence the amount you can afford and your monthly mortgage payment, in addition to your DTI and housing expense ratios.

You should keep the following factors in mind before you start looking for a new home.

Mortgage Term

The term of a mortgage refers to the amount of time it takes for you to repay the loan. Although there are other terms available, 15 and 30 years are the most common. Depending on your mortgage term, your monthly payments will vary. You can expect smaller monthly payments as your loan term lengthens.

 

Mortgage Interest Rate

 

The mortgage rate is the interest rate on your mortgage. Your lender determines the interest rate on your mortgage, which can be fixed or adjustable. During the loan period, they may remain the same or change. Factors such as your credit score, down payment, and down payment amount can affect your interest rate.

 

Your Monthly Budget

 

You should consider your budget as soon as you've analyzed your DTI and any debt you may have. When it comes to mortgage payments, how does it fit in? Start tracking your expenses and income if you don't already have one. Use an online budgeting tool or create a personal budget spreadsheet.

Reserves

Suppose you lose your job or experience another event that affects your ability to make your mortgage payment. In that case, reserves allow you to continue to make payments. You should keep at least two months' worth of mortgage payments in your savings account for each loan program.

Down Payment

Putting down 20% of your home purchase price isn't mandatory, but it's still a good idea. With conventional loans (backed by Fannie Mae or Freddie Mac), you can put down as little as 3%.

Make sure to factor down payments into your mortgage calculation, especially if you intend to avoid PMI by paying 20%. If you qualify for certain government loans, you may not need to put down anything at all.

Extra Costs

Additionally, you need to consider homeowners insurance, taxes, closing costs, down payment, and private mortgage insurance.

Bottom Line 

Ultimately, your ability to afford a home depends on your financial situation and preferences. Your decision will require more than deciding how much to spend on mortgage payments each month.

Examine your entire financial situation, whether you are able to repay your mortgage, and what else you may need to save for. After doing all that, it's time to find the perfect house.