How Much House Can I Afford in 2024? [Avoid These Mistakes]

A house is usually considered the biggest purchase of your life, so finding out – “how much house I can afford” is crucial in buying a home. For this, you must analyze or figure out how much cash inflow and outflow you have, your investment/ savings that you’ve made, and how much money you’ll require to pay your medical bills, credit card balances, and student loans.

Let’s look at those crucial aspects that contribute to home-buying.

Which Factors Determine “How Much House Can I Afford?”

The lender must consider some factors to determine “how much the house can afford, such as your,

• Monthly obligations and debts, 
• Employment history, 
• Cash reserve,
• Annual income,
• Credit profile, and
• Calculating your maximum loan amount.

Getting an early qualification feels good. However, you should spend less money on a house that exceeds your budget. Then, you can decide what amount of risk you can handle. 

The 28/36 rule is only for you if you’re a conservative player. It ensures that your monthly mortgage payment does not exceed 28% of your gross income. 

As you step closer to your set limit, your monthly budget could squeeze after the closing, leaving only a small amount for your luxury and other related activities. 

Suppose you purchase a home by going beyond your budget. In that case, it is a great move to consider potential future earnings growth, job security, and cash reserves as the high compensating factors that can relieve all the hustles (especially in long-term growth).

What is the 28/36 Rule and How Does it Work?

The 28/36 rule depicts that you shouldn’t spend more than 28% of your monthly gross income on home-buying and no more than 36% on all-over debt, including the house’s cost. The housing costs encompass what you might hear: Principal, Interest, Taxes, and Insurance (PITI). These all are the essential components of your monthly mortgage payment.

Mortgage lenders leverage the 28/36 rule to identify how much a home can afford in case of taking out a conventional conforming loan. Some lenders also consider it a “thumb rule” to ensure you do not financially exaggerate yourself. 

Lenders must examine the borrower’s capability to repay the mortgage and the 28/36 rule benefits lenders in this regard.

Step-by-Step Process to Calculate How Much House You Can Afford?

Steps are the most crucial aspect: “What price house can I afford.” There’s a defined process to calculate the affordability of a house, which every individual should know. So, let’s learn about them,

1. Find out how much you and your spouse earn each month. Include all the revenue streams, including alimony, rental earnings, investment profits, etc. 
2. The next step is to list the estimation of the total down payment and your housing costs. Include homeowners insurance costs, property tax, estimated mortgage interest rate, and the loan terms (the time for which you want to pay off your mortgage).
3. Finally, tally all your expenses, as this money flows out as monthly expenses. Be specific regarding your spending because this is a huge factor in how much you can afford to spend on a home.

Tools and Resources to Help You Calculate Affordability

Are resources & tools the strong pillars contributing to the seamless affordability calculation? Indeed they are! So, let’s highlight some tools and resources,

1. Homebuyer Resources

These tools and calculators can help you purchase smarter. They offer a mortgage calculator, mortgage affordability calculator, closing costs calculator, and down payment assistance tool.

Mortgage Calculator: The mortgage calculator can estimate your monthly mortgage payments. 

Mortgage Affordability Calculator: This calculator estimates how much home one can afford.

Closing Costs Calculator: This calculator can help you budget by showing you what price house you can afford for general closing fees.

Down Payment Assistance Tool: One can use this tool to learn about programs associated with down payment assistance.

2. Homeowner Resources 

These resources can aid in mastering homeownership, from seasonal maintenance to budgeting. They offer tools such as a mortgage repayment calculator, a mortgage refinance calculator, a loan-to-value (LTV) ratio calculator, and a Fannie Mae loan lookup tool.

Mortgage Repayment Calculator: The mortgage repayment calculator can help determine the monthly payment required to repay your loan.

Mortgage Refinance Calculator: Use the refinance calculator to determine how much you can save monthly by refinancing.

Loan-to-Value Ratio Calculator: The LTV calculator examines the LTV ratio, which signifies the percentage of your house’s value covered by the loan.

3. Renter Resources 

These tools can benefit you by providing guidance through significant milestones as a renter and preparing you to reach your life’s biggest goals, such as homeownership.

Common Mistakes to Avoid When Determining Affordability

The home-buying process involves several complications and mistakes. If you avoid some common mistakes when determining affordability, things can become a cakewalk. Let’s gather some information about these pitfalls.

1. Ignoring the Pre-approval Process 

Getting pre-approval from a financial institution or bank is an important milestone in home buying. You want to look for your dream home but realize you need more funds. Here comes the role of a pre-approval home loan. By this, you can save considerable time and demonstrate to sellers that you are a worthy and committed buyer.

2. Neglecting the Significance of Locality 

The locality can indeed impact the potential for investment returns and the quality of life. A strategically chosen location ensures easy access to all the basics and luxurious amenities, including hospitals, schools, offices, recreational facilities, and shopping areas. 

In addition, central road connectivity or proximity to transportation hubs lowers commute times. The location has an outsized impact on any property’s appreciation and depreciation value.

3. Lack of Funds

Preparing a realistic budget before buying a home is crucial. A budget serves as an individual’s strategic financial plan, incorporating ideal investment decisions. 

A practical and precise budget allows you to identify the price ranges when buying a real estate property while ignoring potential financial barriers.

4. Not Going for Expert Advice

Real estate agents and other experts play a significant role in the confusing world of real estate transactions. Here, agents act as intermediaries between sellers and buyers, helping them navigate the process with thorough knowledge about legal requirements, property values, and market trends. 

Moreover, they also assist you in finding suitable properties within the defined budget and negotiate contracts for client’s interests. 

5. Making a Smaller Down Payment 

Buying a home can sometimes require a small down payment. Loan programs have lowered the workload of high down payments. However, some homeowners have faced issues with this approach. 

Speaking of millennial homeowners, making small down payments has proved to be the most common mistake. Thus, to avoid this, it’s essential to examine the amount you could save for a house down payment because it’s a subjective decision. 

6. Not Doing Home Inspection 

Home inspection plays a crucial role in home-buying, precisely when you’re willing to buy a property in the present situation. Ignoring a professional inspection can cause many problems, as it can create a lack of awareness about possible threats that could result in uncertain repair expenses. 

7. Not Considering Additional Costs 

You must consider monthly additional costs that your landlord previously covered. These expenses include closing costs (usually 3-4 percent), home inspection, moving expenses, loan insurance, title insurance, and appraisal fees. Moreover, you’ll also need to pay garbage bills, the cost of lawn care, and monthly HOA fees. 

8. Failing to Research the Home-buying Process 

Failing to research the home you’re buying can have bitter repercussions. Lack of understanding and knowledge about the property and other aspects like legal requirements, market trends, and financing options can result in missed opportunities and costly mistakes. 

9. Overlooking Future Resale Value 

Despite having a long-term plan to reside in your new home, looking into its resale value is necessary. You can make wise decisions if you know all the market conditions. Pay attention to the traits that grab the buyers, including the neighborhood, surroundings, arrangement of interior spaces, connectivity to central areas, and additional benefits such as a swimming pool, cutting-edge home automation system, well-designed landscaping, etc. 

10. Not Reading the Associated Documents Carefully 

Agreements and contracts serve as consolidated documents that carry various aspects, ranging from responsibilities and rights to the terms of sale of the involved parties. Many new homebuyers need to allocate more time to review some of the essential documents. To rectify this mistake, you must diligently comprehend and read all agreements and contracts related to buying a home.

The Bottom Line

Ensuring a seamless home-buying process gives you huge satisfaction and relief from the question of how much home you can afford. Considering significant advice and avoiding common mistakes can help you buy your dream house. 

Prepare a list that includes all the qualities and features your house must possess, and create a budget so it’ll be easy for you to evaluate. 

Take a consultant from a real estate agent or American Tower & Prologis and learn all the basics of real estate investing. Lastly, remember to read all the legal documents and contracts before making a final call so that you don’t have any regrets afterward. 

Stay tuned with us for more real estate updates!

Happy Investment!

FAQs

How much mortgage payment can I afford?

You could afford to splurge a $4,000 mortgage payment every month. If you have only $500 left after covering other expenses, you are not stretching yourself too much. 

How much house can I afford with an FHA loan?

FHA mortgages are available to homebuyers with 500 or more credit scores and can help you buy a home with less money. If the credit score is below 580, you need to put down 10% of the purchase price, and if the score is 580 or higher, you could put down 3.5 percent.

How much house can I afford with a VA loan?

Retired service members, eligible active duty members, or their spouses might get a qualification from the U.S. Department of Veterans Affairs for down payment-free mortgages. The VA loans do not need PMI and have competitive mortgage rates. 

How much can I afford to spend on a house?

The home affordability calculator offers you an appropriate range of prices based on your input. It considers your monthly liabilities to identify that a home could be within your financial reach.

How much house can I afford on my salary?

Suppose you earn $100,000 a year, which is equal to a monthly amount of $8,333. Using the 28% rule, your mortgage payments must add up to not more than 28% of 8,333, which is approximately $2,333 per month.