You are now leaving our website and entering a third-party website over which we have no control.
How Much Mortgage Can I Afford?
Key takeaways
- Mortgage affordability means having a total monthly house payment that fits your lifestyle and doesn’t overextend your finances
- One figure that indicates what you can afford is your debt-to-income (DTI) ratio, which shows how much of your gross income (before taxes) goes toward all your debt payments
- You can boost mortgage affordability by improving your credit score, lowering DTI, saving for a larger down payment, and comparing lenders
When you're looking to buy a new home, you're likely to ask yourself: "How much mortgage can I afford?" One way to answer that question is to look at mortgage affordability, which means how comfortably your mortgage payment fits into your lifestyle.
A lender looks at a wide range of factors in determining how much to lend you. It’s up to you, however, to decide how big your mortgage can be without feeling financial stress.
Let’s look at how you can determine how much mortgage you can afford as well as how lenders make decisions on mortgage approvals.
What does “mortgage affordability” mean?
Mortgage affordability is an in-depth assessment of your monthly housing costs relative to your income, total debt, and other factors. It can help you determine whether there is likely to be enough money left over for daily living expenses and savings after paying your mortgage.
Before you start home shopping and applying for a mortgage, it makes sense to get a firm grasp of what you can afford. One way to determine where you stand is to consider your debt-to-income (DTI) ratio.
What is a debt-to-income (DTI) ratio?
Your debt-to-income (DTI) ratio shows how much of your gross income (before taxes) goes toward all your debt payments. Many lenders use this ratio as a way of assessing a consumer's ability to repay a loan.
Experience has shown that people who have too much of their income going toward a mortgage payment or toward debt payments in general might have trouble meeting their financial obligations. Lenders use different DTI ratios as benchmarks. Some may think that 36% is a good balance of total debt to total income, others may think that 43% is acceptable.
Lenders use the term “front end” to talk about the monthly house payment. They refer to the total debt compared to gross income as the “back end.” The back end DTI typically is more important to mortgage lenders, but let's look at both figures and what they mean.
Front end DTI
Front end DTI is the ratio of your housing costs to your gross income. Housing costs include:
-
Mortgage principal. The portion of your monthly loan payment that applies to the amount you borrowed
-
Mortgage interest. The portion of your payment that's charged by the lender for loaning you money. It's based on the loan amount and current annual interest rate
-
Property taxes. Many homeowners use an escrow account managed by the mortgage holder to pay state or local government real estate taxes. Lenders count the taxes whether they are paid through escrow or by the homeowner directly
-
Homeowners insurance. Lenders also count the cost of homeowners insurance whether it is paid through escrow or directly
-
PMI insurance. If your down payment is less than 20%, you might be required to pay monthly for this insurance, which covers the lender if you default
-
HOA fees. If your home is governed by a homeowners association, the monthly fee is counted as a housing cost
Back end DTI
Lenders typically focus on the back end DTI because it gives a more complete picture of a mortgage applicant’s finances. A general rule of thumb for consumers is that debt payments should be 36% or less of gross monthly income. At that level of debt, the average consumer is deemed to be capable of paying back a loan and not being overextended.
Total debt payments include:
-
Housing costs
-
Car loans
-
Student loans
-
Credit cards
-
Personal loans
To determine your DTI, add up all your monthly debt payments. Divide your total monthly debt payments by your monthly gross income. To put that into a percentage, multiply by 100.
In other words: DTI ratio = (monthly debt payments ÷ gross monthly income) x 100.
For example, if your total debt payments are $2,200 and your gross monthly income is $7,000, your DTI would be 31%. Your calculations would look like this:
$2,800 ÷ $7,300 = 0.31
0.31 x 100 = 31%
How to calculate how much mortgage you can afford
It's up to you to decide how much of your income you can comfortably spend each month on a mortgage. You can find any number of mortgage affordability calculators online. To make the most of those tools, it might help if you understand all the factors involved in determining how much mortgage you can afford.
Here are some of the key elements:
How does your income affect mortgage affordability?
A higher, stable income typically allows you to qualify for larger loans. Lenders evaluate:
-
Gross monthly income. Your total monthly earnings before taxes, health insurance, or other deductions
-
Consistent employment history. Lenders often require a two-year track record of steady employment to demonstrate reliable income
-
Additional income sources. If properly documented over multiple years, regular bonuses, dividends, or freelance earnings may be considered
How does your credit score affect mortgage affordability?
A credit score is a three-digit number that gives lenders a quick, clear indication of your creditworthiness. The higher the score, which is based on your credit history, the likelier you are to be approved for credit and/or better terms.
When it comes to a mortgage, your credit scores could affect:
-
The interest rate you qualify for
-
The size of the loan you’re approved for
-
Your monthly payment
How does a down payment affect mortgage affordability?
A down payment is the money you pay up-front for a home. A smaller down payment typically can mean more risk for the lender. A larger down payment:
-
Reduces the loan amount. The less you need to borrow, the more affordable the mortgage is likely to be and the less you are likely to pay in interest over the life of the loan
-
Lowers your monthly payment. Smaller loan balances reduce monthly principal and interest charges, which lowers monthly payments
-
May help you avoid private mortgage insurance (PMI). A downpayment of 20% or more typically removes the need for PMI. This also lowers monthly loan expenses
-
Improves loan eligibility. Higher down payments reduce the lender's risk and increase the loan to value ratio. It could give you a better chance of being approved for the loan
How does the mortgage interest rate affect mortgage affordability?
The mortgage interest rate determines how much you will pay each year to borrow the money. A lower rate could give you a lower monthly payment or enable you to buy a more expensive home.
A higher rate could make the home you want less affordable. However, it could be offset by putting down a larger down payment and reducing the amount you need to borrow.
The annual percentage rate (APR) includes the interest you pay in a year, plus any points, mortgage broker fees, and other charges that you paid to get the loan. It reflects the full cost of borrowing for the year, so it tends to be higher than the interest rate.
How does the mortgage term affect mortgage affordability?
The mortgage term is the timeframe for repaying the loan, typically put in years. Here's a 30 year vs. 15 year mortgage comparison:
-
A 30-year mortgage typically has lower monthly payments because the loan amount is divided over many more months—but you could pay more in total interest
-
A 15-year mortgage has higher monthly payments, but you could pay less in total interest because of the shorter term
The length of your chosen loan term directly impacts your affordability level. The term should be based on how much you can afford to pay every month for the loan.
How do property taxes and insurance affect mortgage affordability?
Homeowner insurance premiums and property taxes are typically paid monthly as part of the mortgage payment. The lender puts a certain amount each month in an escrow account and uses that money to pay insurance premiums and taxes when they are due.
This saves the homeowner the trouble of directly paying what can be rather large amounts. It also helps to mitigate the risk of insurance being cancelled or legal trouble ensuing due to payments being missed.
5 tips for increasing how much mortgage you can afford
If you are not happy with the results you get when you calculate the size of the mortgage you can afford, don't get discouraged. Here are 5 steps you can take to change things for the better.
1. Improve your credit score
Improving your credit score could save you thousands of dollars by helping you to qualify for a lower interest rate on your mortgage. A tiny fraction of a percentage point could have a big impact over the life of a 30-year loan.
Start by getting a copy of your credit score—to see where you stand—and your credit report—to see if there are any errors that should be corrected in your favor. Among the many things you could do to improve your score, some basic ones include:
-
Make all payments on time
-
Pay down credit card balances
-
Keep old accounts open
-
Avoid opening multiple new accounts quickly
2. Lower your DTI ratio
This goes hand-in-hand with paying down credit card balances. In the months or years leading up to a home purchase, you could focus your resources on paying down your debts.
It's not easy to address the other side of that debt-to-income ratio—your income—but it's possible that you, and possibly your partner, could increase your regular income and reap the long-term benefits with a more affordable mortgage.
3. Save for a larger down payment
The actions you take based on those first two tips could help you here, too. Making payments on time helps you avoid late fees. Paying down credit card balances and other debt helps to minimize interest charges. That, along with any extra income you add, could help you save money to make a larger down payment.
4. Compare multiple lenders
Lenders offer a wide range of options for mortgages, including affordable mortgage programs with low down payment options.
There could be one in particular that offers the terms that best suit your needs, but how will you find it if you don't shop around?
One place to start is the bank you already have a relationship with. Your bank might offer better mortgage terms for customers who meet certain requirements.
5. Consider first-time buyer programs
If you are a first-time home buyer, look for mortgage programs designed specifically for your situation.
Banks may offer down payment assistance programs and community second mortgages. Other options designed to help people obtain affordable mortgages include FHA loans, VA loans, and FNMA 97 Mortgages.
Common affordability mistakes to avoid
The term "house poor" is used to describe someone who pays so much for their housing that they are hard-pressed to cover other expenses and discretionary spending. To avoid that situation, look out for these common pitfalls.
-
Focusing only on mortgage payment and ignoring taxes/insurance. Taxes and insurance can add a considerable amount to your monthly house payment. They also could rise year over year, which makes it even more important to factor them into your budget
-
Forgetting repair and maintenance costs. Your home will require upkeep and repairs. The work could be quite expensive, too. Some experts recommend budgeting 1% to 3% of your home's value each year for upkeep and repairs
-
Buying at the top of your budget with no safety margin. Unexpected life events or job changes can be very stressful. A mortgage that is barely affordable in good times could add to your stress in difficult times
-
Assuming you need to spend the full amount you qualify for. Lender approval limits could exceed what's actually comfortable for your personal spending habits and budget. The approved limit might not account for any of the pitfalls we just reviewed
FAQs
Lenders evaluate several variables to measure your ability to repay a mortgage. Beyond reviewing gross monthly income and employment history, they review credit scores as they decide on loan applications and set interest rates. Property-related expenses are factored in, along with your debt-to-income (DTI) ratio and down payment size.
All this helps them determine a loan amount they can offer that shouldn't strain your resources.
Your debt-to-income (DTI) ratio shows how much of your gross income (before taxes) goes toward all your debt payments. Many lenders look at this ratio as they assess a consumer's ability to repay a loan.
Experience has shown that people who have too much of their income going toward a mortgage payment or toward debt payments in general might have trouble meeting their financial obligations. They could become house poor, which means they have little or no room for discretionary spending as they stretch their budgets to meet their monthly payments.
The higher the down payment, the less you are likely to spend on interest charges over the life of the loan. And with a 20% down payment, you could avoid having to pay for private mortgage insurance (PMI), which can significantly increase your monthly payment.
However, conventional loans frequently allow for as little as 3% down, while FHA loans require 3.5%. For eligible veterans, VA loans offer 0% down options. And some states offer down payment assistance programs, providing grants or secondary loans to bridge the downpayment gap for qualified buyers.
Related articles
Learn about what to expect with the mortgage and home loan lending process starting with preparing for the application process all the way through closing.
Learn more about mortgage refinance options with TD Bank. Explore why it may be a good option, get a rate quote and see how to get started.
Shopping for a mortgage is crucial to the homebuying process. Compare non-conventional vs. conventional loans, learn some key mortgage terms and more.