How Much Home Can I Afford?

The Affordability process will guide you through some basic information about your income, debt, and mortgage-related choices to provide you with an estimate of your loan qualification potential.

There are two basic formulas commonly used by lenders to determine how much of a mortgage you can reasonably afford. These formulas are called qualifying ratios because they estimate the amount of money you should spend on mortgage payments in relation to your income and other expenses.

It is important to remember that the following ratios may vary from lender to lender and each application is handled on an individual basis, so the guidelines are just that -- guidelines. There are many affordability programs, both government and conventional, that have more lenient requirements for low- and moderate-income families. Many of these programs involve financial counseling to help potential home buyers learn about the financial responsibilities of owning a home.

Generally speaking, to qualify for conventional loans, housing expenses should not exceed 26-28% of your gross monthly income. For FHA loans, the ratio is 29% of gross monthly income. Monthly housing costs include the mortgage principal, interest, taxes and insurance, often abbreviated PITI. For example, if your annual income is $30,000, your gross monthly income is $2,500, and $2500 x 28% = $700. So you would probably qualify for a conventional home loan that requires monthly payments of $700.

Any expenses that extend 11 months or more into the future are termed long-term debt, such as a car loan. Total monthly costs, including PITI and all other long-term debt, should equal no greater than 33-36% of your gross monthly income for conventional loans. Using the same example, $2,500 x 36% = $900. So the total of your monthly housing expenses plus any long-term debts each month cannot exceed $900. For FHA the ratio is 41%.

You can use the Affordability Calculator to help you estimate how much home you can afford.

You can also visit our Consumer Info page, here at Preferred Consumer, to find more information on just how to qualify for a low down payment.