How Much House Can You Afford as a First-Time Homebuyer?
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A home is considered affordable when you can comfortably cover your mortgage and other home-related costs while still keeping up with your other financial obligations, like credit card payments, student loans, or car loans.
The 28/36 Rule
A simple guideline that lenders often use to determine affordability is the 28/36 rule:
Your total monthly housing expenses shouldn’t exceed 28% of your gross monthly income.
Your total monthly debt payments, including your mortgage, shouldn’t exceed 36% of your gross monthly income.
For example, if your monthly income before taxes is $5,000:
Housing costs should stay under $1,400 (28% of $5,000)
Total debt payments should stay under $1,800 (36% of $5,000)
This gives you a rough idea of what you can afford before even speaking to a lender.
How Lenders Evaluate Home Affordability
Lenders use several factors to determine how much home you can afford:
Income: Lenders prefer your monthly housing costs to remain under 28% of your gross income.
Existing Debt: They check your debt-to-income ratio, aiming for under 36%, including mortgages, credit cards, and loans.
Credit Score: A higher score can secure better interest rates, increasing your purchasing power:
740+ → Best rates
680–739 → Good rates
620–679 → Higher rates
Under 620 → Financing is harder, though special programs may help
Down Payment: The more you put down upfront, the smaller your loan and monthly payments. A larger down payment can also boost your competitiveness in a seller’s market.
Interest Rates: Even small increases in rates can significantly raise your monthly payment.
Calculating Your Monthly Mortgage Payment
Knowing your expected monthly mortgage payment is key to understanding what you can afford. It usually includes:
Principal & Interest: The loan itself plus interest. The payment remains the same, but the proportion allocated to principal vs. interest changes over time.
You can calculate your payment using this formula:
M=Pr(1+r)n(1+r)n−1M = P \frac{r(1+r)^n}{(1+r)^n-1}M=P(1+r)n−1r(1+r)n
Where:
M = Monthly payment
P = Principal loan amount
r = Monthly interest rate (annual rate ÷ 12)
n = Total number of payments (loan term × 12)
Property Taxes: Typically 1–2% of your home’s value annually. Taxes can be paid through your lender’s escrow account or directly to your local tax authority.
Homeowners Insurance: Protects your home and belongings. Most lenders allow insurance payments to be included in your monthly mortgage.
Private Mortgage Insurance (PMI): Required if your down payment is less than 20%. It protects the lender in case of default and usually costs 0.3–1.5% of your loan annually. PMI ends once your home equity reaches 20%.
Using an online mortgage calculator makes it easy to estimate payments and test different scenarios with varying loan amounts, interest rates, and down payments.
Ways to Increase Your Home Affordability
If you want to afford a larger home, consider these strategies:
Boost Your Credit Score: Lower interest rates come with higher credit scores, which reduce monthly payments. Pay bills on time, reduce existing debt, avoid opening new credit lines, and check your credit report for errors.
Save for a Bigger Down Payment: More money upfront means smaller monthly payments, no PMI if you reach 20%, and stronger negotiating power in a competitive market.
Take the First Step
Buying your first home may seem overwhelming, but with careful planning and the right guidance, it’s achievable. Start by determining how much house you can afford, and work with an experienced agent who can help you navigate the rest of the process.