Affordability Calculator

Before going shopping on the market, home buyers will want to determine how much house they can afford based on estimated monthly payments. 

You should know that there are several financial factors lenders will take into consideration when deciding whether or not to issue a loan approval. Using an affordability calculator is one of several financial tools home buyers have in their arsenal to determine feasible monthly mortgage payments. 

How Much Home Can You Afford?

When looking to purchase a home and apply for a loan, home buyers will want to follow the 36% rule as a guideline. This rule states that your total monthly debt payments—such as student loans, credit card, car note, expenses, and  your projected mortgage payment, homeowners insurance, and property taxes—should never add up to more than 36% of your gross (pre-tax) income. To calculate this, add the amount you’ll pay for housing to all your other monthly expenses and divide by your monthly income. 

Buying a new home is often both exciting and nerve-wracking. To lessen the stress and ensure a smooth process, potential homeowners must establish how much house they can afford based on a range that will provide stability and financial security. It’s always better to be safe than sorry when it comes to budgeting for a home; using an affordability calculator can help ensure you are searching for a home that fits within the parameters of your budget.

How Can Your Debt-to-Income Ratio Impact How Much House You Can Afford?

Lenders will assess your debt-to-income ratio (DTI), a measurement that shows your monthly income in relation to the amount that goes towards debts and other expenses. This measurement will determine what type of loan you are eligible to qualify for. 

Ideally, your DTI will be set at 43% or lower, but home buyers who exceed this limit may have to undergo additional financial scrutiny or can be subjugated to paying additional fees and costs, including higher interest rates, to mitigate the risks associated with issuing a loan. DTI can be improved by consolidating debts, paying off debts, or increasing your income. 

How Does an Affordability Calculator Work?

Depending on each home buyer’s unique financial status, an affordability calculator acts as a pre-approval tool that analyzes and synthesizes how much home you can afford based on your income and other monthly expenses. An affordability calculator uses a formula with inputs derived from a homebuyer’s financial records and statements to estimate monthly loan payments. The results you get from this calculator will not only help determine your eligibility to qualify for a loan, but they will also serve as a starting point to evaluate the rates and terms you can get on a loan. 

Ready to start plugging your info into a calculator to discover your options? Here’s a list of inputs you’ll need to provide when using an affordability calculator to estimate how much house you can potentially afford:

  • Income. Your income consists of money you receive regularly every month. This can come from your salary or investment profits. This value serves as a baseline indicator of how much home you can afford. To verify your annual income, your lender typically requires two years of W-2s and current paystubs.
  • Major debts. Student loans, auto loans, credit card bills—all of these are examples of other major debts that contribute to your debt-to-income ratio (DTI). Lenders will calculate these when determining your DTI when evaluating the risk of issuing a loan.
  • Down payment. Not every loan type requires a down payment. The rule of thumb has been to put down 20% as a down payment when purchasing a home to avoid private mortgage insurance fees, or PMI, which can add another 2-5% of the loan amount to your monthly payments. Today, there is more flexibility for you on your loan regarding your down payment. There are homebuyer programs your lender will be able to provide you more information with upon your free consultation.
  • Credit score. Variance in credit scores can be the difference of spending or saving thousands in interest over the life of the loan. Credit scores that are considered very poor can make it more difficult (sometimes impossible) to qualify for a loan. Traditionally, higher credit scores have resulted in better interest rates on your loan. The Home Loan Expert is willing to work with you to find a loan that meets your monthly budgeting needs.
  • Interest rate. The type of interest rate you qualify for will have a direct impact on your buying power. Higher interest rates will mean paying thousands more over the life of the loan, whereas lower interest rates will cost less. Keep in mind that monthly payments will first go towards paying off the interest on your loan before they are applied to your remaining principal balance.
  • Loan term. Most loans are issued at repayment schedule intervals of 15 or 30 years. Adjustable-Rate Mortgage (ARM) loans will have a fixed interest rate during the initial period that will fluctuate once that initial period expires. Fixed-rate mortgage interest rates remain constant over the life of the loan. With a 15-year loan term, homeowners will pay lower interest rates over a shortened loan term via more aggressive monthly payments. With a 30-year loan term, it is still possible to find competitively low-interest rates and make lower monthly payments. 
  • Property tax rate. Average property tax rates nationwide hover around 1.1%. This rate varies geographically, from state to state and county to county. 
  • Other costs and fees. Closing costs and fees can add another 2-5% to your purchasing total. This can include appraisal fees, home inspection fees, property taxes, mortgage insurance, and more. Typically these fees get rolled into your loan so you don’t have to pay them up front, but they will be included in a portion of your monthly payments.

Home buyers should leave some wiggle room for unexpected or emergency expenses that are not included in an affordability calculator. A general rule of preparedness is to have three months’ worth of payments at your disposal when looking to buy a house. An affordability calculator is a great financial resource that gives home buyers an idea of how much home they can afford based on their unique financial location. 

How Can The Home Loan Expert Help You Figure Out How Much House You Can Afford?

For more than 15 years, The Home Loan Expert has been helping home buyers make purchasing their dream home a reality. We provide a customer-centric approach to mortgage lending with a team of friendly Experts dedicated to getting you the best deal possible on a loan. An affordability calculator is a great jump-off point for estimating how much home you can afford, but we know nothing beats a face-to-face personalized experience that appreciates each home buyer’s unique financial situation. Our lending Experts know how to relate to our clients, since they come from the same communities we serve.We provide speedy and efficient services with closing times in as little as two weeks. You don’t have to go through the process of figuring out how much home you can afford alone. Your home loan Expert is just a phone call away at 866-221-1521. We are also available to chat online at any time.

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