How Much Home Can I Afford?
January 06, 2022
January 06, 2022
Figuring out just how much home you can afford is one of the most important questions you'll need to answer before you can begin house hunting. Let's break down the factors that help determine your price range.
Get a rough estimate of how much home you can afford by multiplying your annual gross income — the income you earn before taxes and other deductions — by 2.5. For example, if your annual gross income is $50,000, you may be able to afford a home worth $125,000 (this varies depending on current interest rates and your debt and credit history).
Your lender can give you a full picture of what you can afford.
To determine how much home you can afford, lenders use two important guidelines to evaluate how much of your income is going toward your current housing costs and your debts:
In addition to these ratios, there are other factors you should understand in considering how much you can afford.
Your credit score is a key factor that lenders use to help determine if you qualify for a mortgage loan. Because of its prominent role in the homebuying process, it's important you understand how it's compiled, how to obtain your credit report and how to build your credit.
Generally, a higher score can mean a better chance of getting approved for a loan and securing a lower interest rate.
The lower mortgage rates are, the more affordable homeownership becomes for many. Stay up-to-date with mortgage rates to determine the best time for you to buy a home.
You'll need to budget for the one-time expenses you'll pay when your offer on a home is accepted.
The typical homebuyer makes a down payment between 5% and 20% of the purchase price, and some mortgage programs make it possible to put down as little as 3%.
Work with your lender to understand what option is best for you.
Once you get a mortgage, you'll need to pay closing costs that include an appraisal fee, credit report fee, tax services fee, government recording charges and your lender's origination fee. Typically, these costs range from 2% to 5% of your purchase price.
You should also factor in the price of a home inspection and other professional services sometimes required to buy a home. Learn more about these upfront expenses.
In addition to your mortgage, there are additional expenses to consider when planning to buy a home.
If you live within a community governed by a homeowners association (HOA), it's important that you pay your fees as scheduled.
HOA fees typically cover services such as trash removal, lawn care and maintenance for common areas. These fees can increase each year along with the cost of services.
Like owning a car, your home will need regular upkeep to ensure it remains safe and in great shape.
It's important to build a savings plan for life's unexpected emergencies, such as illness, unemployment or necessary but unplanned home repairs.
It's recommended that you set aside between three and six months of living expenses for unexpected emergencies.
For more information and resources about buying a home, visit My Home by Freddie Mac®.