How Much House Can You Afford – Really?

Blog HowMuchHouseAfford@72 (1)

By Donna Freedman
Reviewed by Lauren Bringle, AFC®

To many, owning a home is a vital part of the American Dream. It's also the biggest single purchase most of us will ever make. Too often, people start the process with no idea what kind of housing payment they can afford.

“You don’t learn ‘how to go buy a house’ in school,” says mortgage banker David Yurovchak, of Guild Mortgage in Henderson, Nev.

Some people struggle with home-buying because they got bad advice, or no advice at all. With the right tactics, however, even people with relatively low incomes can purchase homes of their own. While homeownership is generally easier with two incomes, single people and couples with one income buy homes all the time.

If you are wondering, "How much house can I afford?", here's what you need to know to improve your chances.

How expensive of a house can I afford: Having a mortgage mindset

Ask yourself this: Why do I want to buy a home in the first place? And what kind of house can I afford realistically?

Is it because you know you want to live in that town forever? Because your parents told you it’s a great investment? Because your friend who just bought a house says you’re “throwing money away” by renting?

“It is not throwing away money to rent instead of buy,” says certified financial planner Tara Unverzagt, of South Bay Financial Partners in Torrance, CA.

You get a place to live in exchange for your rent, she notes – and sometimes renting is the smart choice. If you’re not sure you want to stay in the area, or if career advancement might mean moving to a different city, renting might be your best bet.

And if you lose your job as a homeowner?

“You have just locked yourself into more fixed expenses to cover that you don’t have when renting,” the CFP says.

By contrast, a renter can cut housing costs by moving to a cheaper place, or maybe back home with the folks.

What kind of loan payment can I afford?

That depends. For starters, it isn’t just about the monthly mortgage payment. It’s also about:

  • Monthly debt payments, such as student loan payments, car payments or credit card debt
  • The need to save for retirement (at least 10% of your salary is generally recommended)
  • Typical monthly expenses like utilities, food, clothes, medical co-pays, college plans if you have kids, and maybe occasional entertainment
  • Your monthly income compared to your expenses
Ideally, your mortgage would cost no more than 30% of your pre-tax salary each month. Some are comfortable going as high as 33%.

Keep in mind, though, that every dollar you spend on the mortgage is a dollar that can’t go toward an emergency fund or retirement savings, or even just a weekend away with your spouse.

“It’s probably going to feel a little constricting,” says wealth manager Christopher Struckhoff, of Lionheart Capital Management in Irvine, CA.

Before applying, you could use an online mortgage calculator to get a rough idea of what payments might look like. All you have to do is plug in basic information about your financial situation into a mortgage affordability calculator to get a solid estimation of your future monthly mortgage payment. Or use this formula: Every $100,000 you borrow means about $500 in monthly debt payments.

For example:

  • $100,000 home = $500 per month
  • $200,000 home = $1,000 per month
  • $250,000 home = $1,250 per month
  • $300,000 home = $1,500 per month
Note: These figures are approximate, and do not include extra expenses such as property taxes, homeowner association or homeowners insurance fees. If you want to get a close estimate, use a home affordability calculator.

Along with these expenses, it's important to factor in your gross monthly income along with any other monthly debt or monthly expenses so you can plan your housing budget. Once again, finding a good home affordability calculator may help you do this.

A mortgage lender will look at your debt to income ratio - the amount of money you owe compared to the amount you earn. While each mortgage lender has its own requirements, a DTI of 36% or lower is considered best (although some lenders will go up as high as 43%).

A lending institution qualifies you based on what it thinks you can pay off with your housing payment. That doesn't mean you have to spend it all, however. The correct question might not be "How much home can I buy?" but rather "How much home should I buy?"

Suppose the lender decides you're qualified for a $300,000 mortgage loan, in an area where homes range from $200,000 to $295,000.

On the plus side, the higher-cost house might offer the location and/or amenities that you want. But it would also carry a bigger monthly payment and other housing costs, which means less cash available for other things you need or want. It also means more square footage to heat, cool, furnish and maintain.

Some people are willing to forego an ideal location or more square footage in order to keep the mortgage payment lower. This, too, could have tradeoffs, such as a longer commute or living farther away from shopping, medical care and other services.

Certified financial planner Dan Herron warns young people against buying “McMansions,” or even just a home that’s slightly more than they should be spending.

“I’m very adamant about buying a house that’s affordable for you,” says Herron, co-founder of Elemental Wealth Advisors in San Luis Obispo, CA.

Would you want as much house as you can get, or would you be more comfortable with lower monthly payments for up to 30 years? Make the decision that’s right for your budget and for your peace of mind.

How much cash do I need to save up?

Making at least a 20% down payment is ideal, for two reasons:

  1. The more you put down, the less you have to borrow.
  2. You won’t have to carry private mortgage insurance, which could cost as much as 1.15% of your loan until you’ve built up enough equity (typically 20%) to get the lender to cancel.
However, it can be tough to save up a 20% down payment, which is probably why the median down payment was 11.4% [1] as of January 2020, according to If you get an FHA loan, you’ll need to come up with at least a 3.5% down payment.

Qualifying borrowers could get a no-down-payment mortgage through the Veterans Administration, available to members of the military, reservists, military retirees and in some cases surviving spouses.

The VA loan doesn’t require private mortgage insurance but does carry a funding fee of as much as 2.5% of the loan, which can be paid in cash upfront or financed as part of the mortgage.

(Note: Lenders working with the VA generally require at least a 620 credit score for a VA loan.

Low- to moderate-income rural residents may qualify for the U.S. Department of Agriculture (USDA) loan program [2] . No down payment is required; however, the property must be located in an approved area as defined by the USDA.

The down payment isn’t the only money you’ll need to save up. Plan for one-time or ongoing costs such as:

Mortgage origination fee. The cost for underwriting your loan application usually runs anywhere from 0.5% to 1% [3] of the mortgage.

Closing costs. These could include items like title examination and insurance, property surveying, and fees for an appraisal, credit report, attorney and deed preparation.

The cost is generally 3.5% of the purchase price [4], although it can go as low as 2.5% or as high as 7%.

Repair/maintenance fund. No more calling the landlord when problems arise, notes Herron. He suggests having another 1% to 2% set aside in case things go wrong.

“When you own a house, if the toilet explodes that’s your problem,” the CFP says.

Higher utility costs. That first heating/cooling bill might be a shock.

Miscellaneous housing expenses. You might have to mow a lawn, or pay to have it mowed. Maybe you want to tear up the carpet in favor of tile floors, or buy a bed for the guest room so your folks can come visit.

Emergency fund. You’ll need to have cash on hand for non-house issues, such as car repairs or medical co-pays.

Fail to keep these costs in mind and you could end up “house poor” – living from paycheck to paycheck because house payment + daily expenses = little to no disposable income.

It’s stressful, Yurovchak says:

“Nobody wants to live just for a mortgage.”

Free money for homebuyers

You might be able to get a grant toward your down payment or some other type of assistance through regional homebuying programs.

For example, the “Homebuyer Dream [5]” program in Albany, NY provides eligible homebuyers with up to $14,500 toward down payments and/or closing costs.

The nonprofit HomesFund, in Southwest Colorado, offers a “Shared Appreciation Loan [6]” from $15,000 to $50,000 that has no monthly payments for 30 years (or when the home is sold, transferred or no longer lived in by the borrower).

Some assistance is job-specific. The “Homes for Texas Heroes [7]” loan program is designed for veterans, police and corrections officers, teachers, and firefighters and EMS personnel. Those who qualify could receive free down payment help for up to 5% of the mortgage amount.

The “Good Neighbor Next Door [8]” program is likewise aimed at law enforcement, firefighters/EMS personnel, and teachers who want to buy in “revitalization areas” as determined by the U.S. Department of Housing and Urban Development. Qualifying homebuyers can get a 50% discount on the home’s list price, and must agree to live there for at least three years.

The U.S. Department of Housing and Urban Development has a state-by-state list [9] of homebuying programs. (Note: Some of these programs may require credit scores of at least 620.)

Do I need a great credit score to get a mortgage?

It certainly doesn’t hurt! Conventional loans (one not backed by the U.S. government) generally require at least a 620 credit score).

The better your score, the lower the interest rate you’re likely to get. Even a 1% difference in the rate could drastically cut the amount of interest you’d pay during the life of the loan.

Here’s an eye-opening example from, based on a 30-year fixed mortgage for $200,000: [10]

  • A credit score of 620 to 639 could get you a rate of 4.427%, for a monthly payment of $1,005. Total interest paid: $161,697
  • A credit score of 640 to 659 could get you a rate of 3.881% (a little more than half a percentage point difference), for a monthly payment of $941. Total interest paid: $138,718
That’s a savings of almost $23,000 in exchange for building your credit score by as little as one point - from 639 to 640.

What if I have a bad credit score?

If you're just starting out, or if you're rebuilding your credit after a run of bad luck (or bad choices), your credit might not be great. But it's still possible to get a mortgage with a bad credit score.

A Federal Housing Administration (FHA) mortgage requires at least a 580 credit score. However, you could have a score as low as 500 and still qualify if you can make at least a 10% down payment.

The USDA loan program for rural residents has given loans to people with credit scores as low as 600.

However, you’ll have to pay mortgage insurance through a pair of fees:

  1. An upfront one (about 1% of the loan amount)
  2. An annual fee (about 0.35% of the loan) as part of your monthly payment throughout the life of the loan
Another option is to get a cosigner for your mortgage – someone who agrees to cover the loan if you stop making payments. The lender will evaluate a potential cosigner’s credit history and income, and the loan will appear on the cosigner’s credit report in addition to yours.

(Note: If your payment is late, it will affect the cosigner’s credit as well as your own.)

What if I can’t afford to buy where I want to live?

If your dream home is in a pricey area, you have several options.

Broaden your search.

The median home price in Philadelphia is $250,000 [11]. The median home price in Maple Shade, NJ – about 13 miles away – is $260,000 [12]. A short drive or public-transit commute could give you a lot more - or less - buying power.

Save a bigger down payment.

The less you have to borrow, the further your mortgage loan will go. Some possibilities: Create a budget to trim living expenses; sell unneeded items and bank the proceeds; get a side hustle or ask your family for cash instead of gifts for special occasions.

Shop around.

Compare offers from several mortgage lenders. Each will give you a Loan Estimate, which explains the terms, interest rate, principal and interest. Do a line-by-line comparison of all the offers.

Use the document’s “Services You Can Shop For [13]” section to get quotes on things like title insurance or survey fees. A little legwork could save you money, especially since the first year’s worth of homeowners insurance will likely be included in the closing costs.

Investigate those homebuying programs.

A little research might score some down payment assistance or other help. If there aren’t any programs near you, see if local lenders have “first-time homebuyer” programs; some of these have decent perks.

Pay off debt.

The money you’re paying to high credit card interest rates is money that could go toward a down payment. You’d also improve your credit score, which can help you get a better mortgage interest rate.

Or suppose your $500-a-month auto loan has six months to go. Make it your business to pay off the car note as fast as possible.

Based on the mortgage formula mentioned earlier, that extra $500 a month could mean an extra $100,000 in home-buying power, Yurovchak says.

For example, if you were comfortable with a $150,000 mortgage before but couldn’t find homes for under $175,000, you’d now be in a position to make an offer.

The bottom line

Does all this sound complicated? That’s because it is complicated. Each person’s finances and gross income are different, and so is their journey to homeownership.

Suppose you find and fall in love with the perfect house. That’s great! Unless, of course, you have a high debt-to-income ratio, few cash reserves and a low credit score.

If that’s the case, right now probably isn’t the right time to buy.

What it is time to do: Work to improve your chances. Use the tactics noted above to get your finances in order, learn all you can about the options and position yourself to buy a home in the near future.

“There’s always going to be houses out there for you,” Struckhoff says. “You’ll find something eventually that will work. It just means taking the time to do the due diligence.”


  1. “Where Buyers Are Making the Lowest—and the Highest—Down Payments” Accessed March 25, 2021

  2. Consumer Financial Protection Bureau. “Special loan programs” Accessed March 25, 2021

  3. National Association of Realtors. “What Exactly Do Closing Costs Cover?” Accessed March 25, 2021

  4. “Real Estate Agent Fees: Who Pays the Bill?” Accessed March 25, 2021

  5. AHP Homeownership Center. “Down Payment Assistance” Accessed March 25, 2021

  6. HomesFund. “Mortgage Assistance” Accessed March 25, 2021

  7. Texas State Affordable Housing Corporation. “Homes for Texas Heroes Program” Accessed March 25, 2021

  8. U.S. Department of Housing and Urban Development. “ABOUT GOOD NEIGHBOR NEXT DOOR” Acccessed March 25, 2021

  9. U.S. Department of Housing and Urban Development. “Local Information” Accessed March 25, 2021

  10. myFICO. “Loan Savings Calculator” Accessed March 25, 2021

  11. “Home values in Philadelphia, PA” Accessed March 25, 2021

  12. “Burlington County NJ housing market” Accessed March 25, 2021

  13. Consumer Financial Protection Bureau. “Home Loan Toolkit” Accessed March 25, 2021

About the author

Longtime personal finance writer Donna Freedman lives and writes in Anchorage, Alaska. See Donna on Linkedin and Twitter.

About the reviewer

Lauren Bringle is an Accredited Financial Counselor® with Self Financial– a financial technology company with a mission to help people build credit and savings. See Lauren on Linkedin and Twitter.

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Written on July 30, 2020
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Disclaimer: Self is not providing financial advice. The content presented does not reflect the view of the Issuing Banks and is presented for general education and informational purposes only. Please consult with a qualified professional for financial advice.

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