How Much Mortgage Can I Afford?

When you start the process of buying a house, there’s an important question to address right off the bat: How much home can I afford? In other words, what mortgage can I afford? You might have certain amenities, location, square footage and aesthetics on your wish list, but the most important factor in your decision-making process comes down to budget.

When you’re determining mortgage affordability, you need to consider all your financial priorities. If your mortgage payment is too high, you’ll limit your ability to buy the things you need, pay for emergency expenses and save money. You’ll also limit the amount of money you have available to invest in things you enjoy, like traveling, entertainment and hobbies. That’s why figuring out how much house you can really afford is so important.

How much you can afford depends on a number of variables, including your income, the taxes in your area, the amount you have saved for a down payment, your other financial obligations and more. That means that there’s no single mortgage rule of thumb that tells you how much house payment is right for you. However, there are several factors that can guide you toward making the best decision as you get ready to start shopping for houses. 

Here are some tips for figuring out how much mortgage you can afford, as well as some other considerations as you move through the exciting process of buying a home. And if you want to talk to a pro about how buying a house affects your larger financial picture, reach out to Farm Bureau.

How Much Mortgage Can I Afford?

In general, the mortgage rule of thumb is that your mortgage and related housing expenses shouldn’t exceed 28% of your gross monthly income — in other words, the amount you make before taxes are taken out. It’s important to note that this percentage includes things like property taxes, insurance and Homeowners Association (HOA) fees, which you may need to add to the estimated monthly mortgage payment for the homes you’re considering to see what your true expenses would be. 

Buying a home is a big financial commitment. It’s important to make sure that the mortgage you take on is suited to your personal financial goals and your current financial situation. That means that percentage may be lower or higher, depending on your particular needs, debt and expenses.

You Need a Budget

The best way to determine how much mortgage you can afford is to create and manage a budget that accounts for your ongoing expenses, debts and savings. When you have a good handle on how you are currently using your money, you can easily identify how much income you can put toward your mortgage and related expenses. You can also flag areas in your budget where you can reasonably cut expenses if you decide to allocate more funds to your mortgage payment. (For instance, you might choose to eat out twice a week instead of four times a week or to cut down on the number of streaming platform subscriptions that you pay for.) 

Likewise, your debt-to-income ratio will be an important factor to monitor. This is the number you get when you divide your monthly debt payment by your monthly gross income. Ideally, it would be as low as possible. The lower your debt-to-income ratio, the less of a risk you are to lenders.

It’s also helpful to seek advice from professionals who can guide you as you make decisions that will help you achieve long-term financial success and security. Your mortgage lender, for example, will help you figure out how much home loan you qualify for based on your income, credit history and other information. But your mortgage lender won’t help you determine how much home you can actually afford. Too often, home buyers buy a home based on the amount of loan they qualify for, not the amount they can reasonably afford based on their lifestyle and financial goals, leaving them with a mortgage that’s too high. So, know your numbers going in and seek guidance from people who will look at your full financial picture.

What Else Will I Have to Pay For?

Remember: there’s more to owning a house than just the listing price. Your mortgage payment will include more than just the principal and interest on your loan. One unexpected cost of buying a home is private mortgage insurance (PMI), which you’ll be required to pay if you aren’t able to make a down payment of at least 20%. And depending on where and what type of home you buy, you may be required to pay HOA fees.

Also included in your mortgage payment are your property taxes. If you’re buying into a booming community or purchasing a fixer-upper (watch out for these money pit red flags, by the way), your property taxes may go up. Check to see when your area will have its next property tax assessment and find out what to expect.

We’re Here to Help

When you’ve purchased a home, remember to protect it. Reach out to a Farm Bureau agent to determine which home and property insurance coverage is the best fit for your needs and budget.