The size of the mortgage you may be offered depends on your income, debts, credit history, assets, and down payment.
Fortunately, you can get an idea of how much of a mortgage you can afford by using calculators and pre-qualifying with lenders, and a specific number by getting pre-approved.
An old standard, the 28/36 rule, says that your mortgage payment shouldn’t be more than 28% of your monthly gross income and 36% of your total debt.
How Much Mortgage Can I Afford?
The mortgage loan process often starts informally.
You know, you look at advertised rates and plug numbers into calculators.
You learn about conventional vs. government-backed loans and think about mortgage terms.
To get more realistic, it’s good to know your credit score and debt-to-income ratio (DTI), the percentage of your gross monthly income that you spend on monthly debt payments.
A credit score in the 500s may be enough to qualify for an FHA or VA loan; a score of at least 620 will probably be needed to obtain a conventional mortgage. In general, mortgage lenders like to see a DTI ratio of 36% or under, although a lot depends on other qualifications and the type of loan you’re applying for.
Getting pre-qualified is usually quick and painless: You provide a few basics about your finances to a lender by phone or online. The lender does a soft credit inquiry and provides an estimate of what you can afford.
Maybe you get serious and seek pre-approval for a mortgage, which most sellers in a competitive market demand. Lenders train a microscope on your finances, do a hard credit pull, and come up with a specific number for what you can tentatively afford.
It might be a good idea to have any gift toward a down payment or closing costs already reflected in your account. Any mortgage lender you choose will expect a gift letter documenting the funds.
How high can you go? High. For conventional loans, the conforming loan limit for a one-unit property was $647,200 in most of the country and $970,800 in high-cost areas in 2022. But jumbo loans go above those limits.
Calculate Your Potential Mortgage
How Much House Can I Afford With an FHA Loan?
Mortgages insured by the Federal Housing Administration are issued by private lenders like banks, credit unions, and mortgage companies that offer them, which weigh an applicant’s credit score (sometimes as low as 500) and two ratios:
• DTI ratio. Up to 50%, if the credit score is at least 580 and other qualifications are in place.
• Front-end ratio, or the ratio of proposed monthly mortgage payments to monthly income. Can be as high as 40% if the credit score is at least 580.
If your credit score is from 500 to 579, you may be able to get an FHA loan and put 10% down. If your score is 580 or higher, you may put as little as 3.5% down.
Home loan limits vary by area for traditional FHA loans, which may be used for up to four units as long as the buyer lives in one unit. An upfront mortgage insurance payment of 1.75% of the purchase price and annual mortgage insurance premiums (MIP) apply.
How Much House Can I Afford With a VA Loan?
The Department of Veterans Affairs issues some home loans directly, but most VA loans are guaranteed in part by the VA and procured from private lenders.
VA loans are for active-duty service members, veterans, and some surviving spouses. Lenders often look for a minimum credit score in the low to mid-600s and a DTI of 41% or under, but those figures are not set in stone.
There is no home purchase limit if a borrower has never used a VA loan, has paid off a VA loan and sold the property, or has had a foreclosure or short sale but repaid the VA in full.
No down payment is required as long as the sales price of the one- to four-unit owner-occupied property or VA-approved condo does not exceed the appraised value. Most borrowers will pay a one-time funding fee of 1.4% to 3.6% of the amount being borrowed.
Factoring Insurance and Taxes Into Your Mortgage
A mortgage payment is made up of more than principal and interest. Homeowners insurance and property taxes are part of the deal.
Part of the mortgage payment for those bills is usually held in escrow by the mortgage servicer and paid in full when due. Flood insurance, if you’re in a high-risk flood area or your lender requires it, also will be included.
The local tax rate and the property’s assessed value determine the amount of property taxes owed. Homeowners insurance varies by area, but $250,000 in dwelling coverage averages $1,380 a year. Flood insurance, if required, averages $800 to $1,200 per year, but premiums vary widely depending on location and a home’s risk level.
Any lender you apply for a loan with will send you a loan estimate, a three-page summary of the loan offer. Total monthly costs listed will include principal and interest, property taxes, homeowners insurance, and any mortgage insurance.
Keeping Track of All Other Homeowner Fees
Buyers can be floored by the true cost of buying a home. Consider these other costs.
Private Mortgage Insurance
Annual private mortgage insurance (PMI) is the price to pay if you put less than 20% down on a conventional mortgage, unless you avoid PMI by seeking a piggyback loan or lender-paid mortgage insurance.
PMI often ranges from 0.5% to 1.5% of the total loan amount annually until you reach 20% equity.
MIP for an FHA loan ranges from 0.45% to 1.05% of the loan amount per year for the life of the loan if you put less than 10% down.
Monthly or quarterly homeowners association fees are usually paid directly to the HOA. They can be significant in size and in another way: If the assessments are brushed off, the HOA can place a lien on your property and even foreclose.
Painful yet necessary, closing costs average 2% to 5% of the amount of the home loan. Many lenders allow them to be rolled into the loan.
Low- to moderate-income homebuyers, and especially first-time homebuyers, may be able to get help with a down payment and closing costs.
You might try to research what similar-size homes in the area are spending for electricity, gas, water and sewer, and garbage collection, as well as internet and possibly cable TV.
Things deteriorate, sooner or later. They just do.
How Much Can I Afford to Spend on a House?
Divulging all your financial intel, allowing a deep credit check, and getting pre-approved for a mortgage will give you a limit to work with. You can get pre-approved with more than one lender and compare offers.
Rate shopping within 14 days will be treated as a single credit inquiry.
How Much House Can I Afford On My Salary?
Your salary certainly is a big factor in qualifying for a mortgage, but so is your debt load. Credit history and assets also play roles in determining how much of a mortgage you can afford.
If you’re thinking of buying a home, you’re probably asking yourself: How much mortgage can I afford? A good online calculator can provide an idea. Getting pre-approved for a mortgage will be much more informative.
SoFi offers a range of fixed-rate home loans with competitive rates. Check out the advantages of SoFi Mortgage Loans and get pre-qualified today.
Terms, conditions, and state restrictions apply. Not all products are available in all states. See SoFi.com/eligibility for more information.
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