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How Much Mortgage Do I Qualify For? Everything You Need To Know About Home Affordability

Jamie Johnson6-Minute Read
January 31, 2022

For most people, a home is one of the most significant purchases they’ll ever make. Figuring out what you can afford is a crucial part of the homebuying process. You want to be able to comfortably make your monthly mortgage payments and still meet other financial obligations.

Right now, you may be interested in buying a home but wondering, “How much house can I afford?” If so, this article will help you determine how much mortgage you qualify for.

How To Calculate How Much House You Can Afford

Lenders use multiple factors to determine what size mortgage you qualify for. Here are some of the criteria lenders look at: 

  • Your gross monthly income
  • Your annual income
  • Total down payment
  • Monthly expenses
  • Credit score
  • Debt-to-income ratio

If you’re in the beginning stages of looking for a home, a home affordability calculator is a valuable tool you can use. This calculator helps you estimate your monthly mortgage payments and determine what you can afford.

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What Factors Determine How Much House I Can Afford?

Determining how much house you can afford isn’t a straightforward process — there are many factors lenders look at when considering home affordability. But here are five financial factors your lender will consider when you’re buying a house.

Mortgage Term

Different mortgage terms will affect your monthly payment amount. Most homeowners will choose either a 15-year or 30-year mortgage, and this choice will affect your monthly payments.

If you opt for a 30-year mortgage, your monthly payments will be lower. However, you’ll receive a higher interest rate and will end up paying more money in interest over the life of the loan.

A 15-year mortgage will come with lower interest rates, but your monthly payments will be higher. But since you’re paying off the mortgage in half the time, you’ll pay less over the life of the loan.

Interest Rate

The interest rate you receive will also affect your monthly payments. The higher your interest rate is, the higher your monthly payments will be. The best way to land a low interest rate is by improving your credit score since borrowers with excellent credit will qualify for the best terms and mortgage rates.

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Down Payment

A down payment is the amount of money you pay out-of-pocket for the home. Many lenders look for a down payment of at least 20%, though you can find no-down payment mortgages or lenders that will accept a down payment as low as 3%.

The more you pay in a down payment, the less money you’ll need in financing. A lower financing amount will help lower your monthly payments.

Closing Costs

Closing costs are the fees you’ll pay when you close on your home. Your closing costs will usually include expenses like the appraisal fee, the closing fee, mortgage insurance, and more. The exact amount you pay in closing costs will vary depending on where you live and the type of loan you’re taking out.

Some lenders will let you roll your closing costs into the loan. You’ll still pay the closing costs, but this is a way to avoid paying them out-of-pocket. However, rolling closing costs into the loan will increase your monthly mortgage payments. 

Taxes And Insurance

Once you buy a home, you have to budget for things like property taxes and homeowners insurance. Property taxes help your state government fund education, emergency services, and public parks. Your property taxes are based on the assessed property value and your current tax rate.

Homeowners insurance covers damage to your home, and your lender requires it. The price of homeowners insurance is based on the location and age of your home, your deductible, and the type of coverage you need.

The good news is that your lender will make tax and insurance payments on your behalf as part of the monthly mortgage payment. But these expenses will cause your mortgage payments to go up. 

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Should I Buy Or Rent?

Many people wonder whether they should buy a house or wait and continue to rent. Certain advantages come with renting, and waiting can give you time to improve your credit or save up for a down payment.

If you’re on the fence, here are some of the pros and cons of buying a home as opposed to continuing to rent.

Pros

  • Your home is an investment and will continue to appreciate in value.
  • Your mortgage payments will help you build equity in your home.
  • You can customize your living space, while renters may be more limited in their options.
  • When you buy a home, you’re building roots in a community.

Cons

  • You’ll have to pay for any maintenance costs that come up, whereas this cost is usually covered for renters.
  • It’s more difficult for homeowners to pick up and move than it is for renters.
  • You’ll have to pay for additional expenses, like HOA dues and property taxes.

How Can I Increase The Amount Of Mortgage I Qualify For?

There are multiple ways to increase the amount of mortgage you qualify for. But the two most effective strategies are improving your credit score and lowering your debt-to-income ratio.

One of the easiest ways to improve your credit score is by paying your bills on time every month. Payment history counts for 30% of your FICO® Score, so paying your bills on time will go a long way toward improving your credit.

There are two ways you can go about lowering your debt-to-income ratio: increasing your monthly income and lowering your monthly debt payments. You can increase your income by working overtime, taking on a side hustle, or asking for a raise.

From there, you can use the extra income to pay off outstanding balances. It’s a good idea to focus on paying down your debt with the highest interest rates and highest monthly payments.

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The Bottom Line

Many factors go into determining how much mortgage you can qualify for. Fortunately, there are many actions you can take to improve your home buying power, like improving your credit score and lowering your debt-to-income ratio.

If you’re ready to take the next step in the home buying process, you may enjoy this article on what to look for in a house.

Jamie Johnson

Jamie Johnson is a Kansas City-based freelance writer who writes about a variety of personal finance topics, including loans, building credit, and paying down debt. She currently writes for clients like the U.S. Chamber of Commerce, Business Insider, and Bankrate.