Thinking about buying a house? It’s exciting, but also overwhelming, especially when you ask yourself, How much house can I actually afford?
The truth? Affordability isn’t just about the listing price. It is the ability of an individual or household to pay all the costs of buying a home without incurring financial stress. Since incomes vary, home affordability isn’t the same for everyone.
Here’s a detailed explanation of the top five factors that affect your home affordability:
Home Prices
This is a no-brainer. The price tag on your ideal home sets the baseline for everything else — down payment, mortgage rate, and monthly payments.
Home prices rise and fall as inflation rates fluctuate and market conditions shift. Moreover, they vary depending on the neighborhood, nearby schools, and the overall cost of living.
Remember to factor in closing costs and home maintenance tasks (if needed) when considering home prices. This will help manage your expectations.
Income Level
The next factor is your household income level. This is the total money you and your co-borrower (if applicable) earn before taxes and payments. In addition to your salary or wage, factor in any bonuses, side gigs, rental income, or passive income streams. The higher your income, the more easily you can afford a home.
Debt-to-Income Ratio
In addition to your gross income, your monthly debts greatly impact your home affordability. This includes student loans, credit cards, auto loans, or other personal loans.
Once you’ve clarified your monthly income and debt payments, lenders calculate your debt-to-income ratio. It is the percentage of your monthly income that goes toward making debt payments. A common rule is 28/36, which states that no more than 28% of your gross income should go toward your housing costs, and no more than 36% toward total debt.
The easiest way to find your affordability is to use a home affordability calculator. It will factor in mortgage rates, down payment, and other costs to give you a more accurate idea.
Mortgage Down Payment
A down payment is the biggest out-of-pocket expense you have to make when buying a home. For years, lenders and homeowners considered 20% to be the ideal down payment.
However, this isn’t the case anymore as reliable lenders like AmeriSave are changing market dynamics. Given inflation rates and rising living costs, lenders accept down payments as low as 3%. This has made owning a home more than just a dream.
Interest Rate
Mortgage interest is basically the cost of borrowing, and it has a huge impact on your home affordability. Even a small change in rate, such as 7% instead of 6.5%, can increase your monthly payment by hundreds of dollars. This is why it’s important to pay close attention to the interest rate when buying a house.
A fixed- and low-interest mortgage rate is ideal. The reason is simple: With a lower interest rate, more of your monthly payment goes toward paying off the actual loan, not just interest.