Buying a home is one of the largest financial decisions most people will make, and understanding how much you can afford before you start house hunting is crucial. Without a clear budget in mind, it’s easy to fall in love with a home that stretches your finances too thin, leading to financial stress down the road.

Setting a Realistic Homebuying Budget

Before diving into the homebuying process, it’s essential to have a clear understanding of your financial situation. Assessing your income, expenses, and financial priorities will help you determine a realistic budget for your home purchase.

Start developing a budget by calculating your total monthly income, including:

• Salary or wages (after taxes)
• Bonuses, commissions, or side income
• Any passive income (rental properties, investments, etc.)

Review your monthly expenses, such as:

• Rent or current mortgage payments
• Utilities (electricity, water, internet, etc.)
• Groceries and dining out
• Transportation (gas, insurance)
• Debt payments (credit cards, student loans, auto loans)
• Health insurance and medical expenses
• Entertainment, travel, and miscellaneous spending

Define Other Financial Priorities

Consider the ongoing costs of homeownership, such as repairs, maintenance, insurance, and property tax increases, and prepare for those costs by building up an emergency fund with 3 to 6 months’ worth of living expenses. Consider any other financial goals that are important to you, such as:

• Savings Contributions (retirement or investments)
• Planning for expenses from significant life changes like marriage or having children

By listing out your income, expenses, and financial goals, you’ll get a clearer picture of how much money you have available for a mortgage payment without straining your finances and ensure you don’t overextend your budget.

Follow the 28/36 Rule

Lenders use a common guideline known as the 28/36 rule to determine how much home you can afford:

By following this guideline, you can ensure you’re taking on a mortgage that fits within a sustainable budget, allowing for flexibility and financial security.

What Factors Affect Home Affordability?

When determining how much home you can afford, lenders consider several financial factors to assess your ability to take on a mortgage. Understanding these key elements will help you determine a budget and improve your chances of securing favorable loan terms.

Income sources considered include:

• Salary or hourly wages
• Bonuses, commissions, and overtime (if received and consistent for two years)
• Self-employment income (with documented history)
• Rental income from investment properties
• Alimony or child support (if applicable and consistent)

2. Your Debt-to-Income Ratio (DTI) is a key metric that lenders use to evaluate your ability to afford a home. It measures the percentage of your gross income that goes toward paying debts each month. A lower DTI signals to lenders that you have enough financial flexibility to take on a mortgage without excessive risk.

3. Your credit score impacts the mortgage rates and loan options available to you. Lenders use this score to evaluate your creditworthiness and determine the level of risk in lending to you. A higher credit score can save you thousands of dollars over the life of your loan by securing a lower interest rate.

4. The size of your down payment directly impacts affordability, as it affects your loan amount, monthly payments, and whether you’ll need to pay private mortgage insurance (PMI). If saving for a large down payment is a challenge, consider first-time homebuyer programs or FHA loans, which allow lower down payments with more flexible credit requirements.

5. Your loan type and interest rate impact both your monthly payment and total cost. Fixed-rate mortgages offer stability with a constant interest rate over 15 or 30 years, while adjustable-rate mortgages (ARMs) start with lower rates that adjust later—ideal if you plan to move or refinance in a short period of time. Interest rates also affect affordability; even a 0.5% change can significantly impact your payment.

Get Pre-Approved for a Mortgage Before House Hunting

Pre-approval is a crucial step in the homebuying process, giving you a clear budget, making you a stronger buyer, and streamlining your home purchase. Unlike pre-qualification, pre-approval is a thorough review of your finances, providing a lender’s conditional commitment.

Why Pre-Approval Matters:

• Defines Your Budget: Know exactly how much you can borrow.
• Boosts Credibility: Sellers take pre-approved buyers more seriously.
• Speeds Up Closing: Much of the financial review is already complete.
• Identifies Financial Issues Early: Allows time to fix credit or income concerns.

Standard Mortgage is committed to helping individuals and families achieve their dream of homeownership. With personalized service and decades of expertise, we make the mortgage process simple and stress-free, providing the guidance and support you need to make informed decisions that go beyond just securing loans. We’re here to help you invest in your future. Reach out to a loan officer today and take the first step toward owning a home.