How Much Should You Spend on Your House Payment?

Your monthly house payment includes more than just interest and principal. Most mortgages require you to make payments toward your property taxes each month. Research property taxes for the houses you are considering and add this to your estimate. The property taxes on a $400,000 house are likely to be higher than those on a $300,000 house. Most lenders will require you to pay for homeowners insurance as part of your monthly bill, too. Insurance costs vary by state and community, but the national average is $1,249 a year, according to the National Association of Insurance Commissioners (NAIC). Just like property taxes, more expensive homes tend to have higher homeowners insurance costs. Many loans require mortgage insurance, and these costs are part of your monthly payment, too. Mortgage insurance is not required when buying a home with a VA loan or Conventional loans, when your down payment is at least 20%.

Does How Much You Earn and Spend Affect How Much You Should Spend on a House?

After you’ve looked at estimates for your monthly house payment, then think about all your other monthly debts and expenses. Monthly gross income is your earnings for the year before taxes and deductions are taken out. Debts are recurring expenses you pay off monthly, like a car payment, credit card, or college loans. Owning a home often comes with bigger utility bills for electricity, heating and cooling, water, internet, and more. Ask the real estate agent or the seller if they have an estimate of the monthly utility costs of the home. Owning a home also comes with expected and unexpected repairs. Having an emergency fund with cash ready for surprises is a good idea. It’s a good idea to start saving for retirement as early as you can. If you have kids, you may want to include childcare expenses or savings for college education in your budget, too. Part of your monthly gross income will probably go toward paying income taxes. Review your spending habits, including cell phone and TV/internet services, entertainment, eating out, clothing, and food to get a better picture of how much you spend each month. You’ll want to make sure you build in these expenses to have an accurate amount you can work with for a monthly house payment. Buying the most expensive home you can afford often means you have to cut back in other areas of your life. A good way to look at the big picture of your monthly spending is to calculate your debt-to-income ratio, which you get by dividing your total monthly debt payments by your gross monthly income. Generally, lenders prefer a debt-to-income ratio below 36%. This means that you are only spending 36% of your monthly gross income on all your debt payments including your house payment. This leaves 64% of your monthly gross income for all your other expenses, which is a reasonable rule of thumb for many people. Many lenders require that you have a debt-to-income ratio no higher than 36%, which means this is an important number to know when you are trying to get approved for a mortgage.

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How Much Should You Spend on a House?

Think About All Your Expenses Before You Decide

Buying a house is exciting, but it's also a major financial decision. That's why the number one question you need to ask yourself is: How much house can I afford?

Setting a realistic budget and buying an affordable home can set you up for financial success and save you from a lot of stress. You can spend a comfortable amount of your income on your house and still save for other goals.

There are many factors that go into determining home affordability, including your income and your spending habits. This guide will explain how to determine how much home you can afford so you can make an informed home buying choice.

Estimating the Cost of Home Affordability

When you are trying to answer the question “How much can I afford for a house?”, the key is to determine the amount of income you have available each month for your housing payment. You'll need to think about both your income and spending (or debts) to best do that.

1. How Much Do You Earn?

Evaluating home affordability starts with looking at earnings. After all, the more money you earn, the more you will have available for your home and other expenses.

Net earnings are what matter when answering the age-old question "How much house payment can I afford?"

Your gross earnings are the total income you earn, while your net earnings are your earnings minus deductions, including:

Income tax and Social Security tax that are withheld from your paycheck before you receive it.
Any money taken out of your check for things like health and dental insurance premiums.

Since you can't spend the money you are using to pay your income tax or health insurance on your housing payments, you should consider your net income when determining a mortgage payment you can comfortably afford.

You should also include income from all sources, including things like your primary job, a side hustle, or any interest you receive, as long as each income source is steady and reliable.

2. How Much Do You Spend?

Next, you need to think about how much you spend.

You probably don't want to make drastic lifestyle changes and cut back all of your “fun” spending to afford a home. So, you need to know where your money is currently going before you can determine the amount available for housing costs.

When you consider how much you spend, think about the costs that will go up or down when you move. For example, if you are going to buy a house somewhere further from work, you may face added commuting costs. On the other hand, if you have children and are buying a house next door to your parents so they can provide free child care, your expenses may go down.

Some of the expenses that you should factor in when determining spending include:

Monthly debt payments. This is for things like your auto loans, student loans, credit cards, and other money you owe and pay back monthly.
Utilities: How much will heating, cooling, water/sewage, and electric cost in your new home?
Groceries
Entertainment, including Internet, television, streaming subscriptions, dining out, and activities you do regularly
Home maintenance and repairs which is usually estimated at around 1% to 2% of your home's value each year
Retirement contributions
Savings and emergency fund contributions
Transportation costs
Childcare expenses or children's activities
Clothing
Pet-related expenses

You can review past credit card and bank statements to estimate your spending or can track spending using an app or spreadsheet. Don't forget to consider one-off expenses like an annual vacation or holiday or birthday presents, which you can divide out monthly to make sure you're preparing for these costs.

3. What Can You Dedicate to a House Payment?

Finally, the key part of figuring out how much home you can afford: Estimating the amount of income you can dedicate to your housing payment.

This will equal the amount you earn, minus the amount that you spend.

Remember, your monthly mortgage payment includes more than just interest and principal. You will also need to pay:

Property taxes:
Most lenders require you to make payments toward your annual property taxes as part of each monthly mortgage payment. Research property taxes for areas you’re considering based on the purchase price you want to pay for a home. Most states have online tools to estimate property taxes based on your purchase price.
Homeowners insurance:
Most lenders also require you to pay for homeowners insurance as part of your monthly bill. Insurance costs vary by state and community.
Mortgage insurance:
Some loans require mortgage insurance. These costs are part of your monthly payment, too. Mortgage insurance is not required when buying a home with a VA loan or with a conventional loan if your down payment is at least 20%.

For a quick look at how much home you can afford, use our home affordability calculator. The calculator considers the purchase price of the home, as well as your mortgage amount, interest rate, property taxes, and homeowners' insurance. Change the values to change your estimate.

How Lenders Determine Home Affordability

When you determine how much house you can afford, your focus should be on your specific lifestyle. When lenders estimate affordability, they use standard formulas and objective criteria rather than digging into very specific details like your monthly grocery bill.

Here is what lenders look at when deciding how much you can qualify for to buy a house.

Your work stability and income:
Lenders look at your income, but only reliable and stable sources of income. Typically, this means income you’ve consistently earned for the past two years.
Your debt-to-income (DTI) ratio:
Lenders compare your monthly housing costs to your income, as well as your total debt to income. While different loan options have different rules regarding the maximum debt-to-income ratio allowed, lenders usually want housing costs kept to 28% or less of gross income and total debt costs kept to 36% or less of gross income. There are many exceptions to this, so don’t worry if your DTI numbers are higher.
Your down payment and savings:
Most mortgage types (except for VA loans) require a minimum down payment and some assets in reserves. A larger down payment should qualify you for a better rate and mortgage terms. Your down payment also reduces the amount you need to borrow, so a larger down payment means you pay less interest overall for your home.
Your credit score:
Your credit score is a three-digit number calculated from factors like payment history, percent of available credit used, types of credit, how old your accounts are, and how much new credit you've obtained recently. It provides a snapshot into whether you're responsible with debt, and lenders can offer lower rates to people with good or excellent credit.
The type of loan:
Fixed-rate mortgages can have higher starting rates than adjustable-rate mortgages (ARMs), but ARMs are riskier because your rate can go up over time. There are also alternative options like interest-only loans that require you only pay interest for a period of time. The loan type affects your minimum monthly payments.

You'll be asked to provide documents like pay stubs and tax returns to your lender so they can confirm financial details when determining how much home you can afford.

What Is the 28/36 Rule?

The 28/36 rule is applied by many lenders as a quick way to determine what percentage of your income should go toward your mortgage.

While some loan types allow lenders to have looser standards, generally it's ideal to keep your total housing costs (including principal, interest, taxes, and insurance) to 28% (or less) of your income and total debts (including housing payments and all other loans) to 36% of your income (or less). Keep in mind, you might be able to qualify for a mortgage with numbers higher than these, and Freedom Mortgage can help you figure out exactly how much home you can afford.

Final Thoughts on How Much Home You Can Afford

Now you know how to figure out the answer to the question, “How much house can I afford?” You can go through the process of calculating your income and expenses to see how much room there is in your budget to comfortably afford mortgage payments.

Finally, you can also get prequalified for a mortgage to find out what amount you can likely qualify to borrow and what your monthly payments would be. Reach out to us today so you can start your home-buying journey with Freedom Mortgage and find a house you can not only afford but also love. That’s what home is all about.