How much house can I afford to buy?

Does my debt-to-income ratio impact how much house I can afford?

Yes, when you apply for a mortgage, your bank will calculate your total monthly debts and your pre-tax income to help determine the loan amount you're eligible. Your bank will typically look at your front- and back-end ratio to determine how much you can borrow.

Your front-end ratio, also known as your housing ratio, is how much of your income you spend on housing expenses. Your back-end ratio, also known as your debt ratio, is how much of your income you spend on debt, including car payments, student loans, credit cards, other mortgages, etc. Many professionals use the 28/36 rule, which recommends a front-end ratio of no more than 28% and back-end ratio of no more than 36%.

When starting the process of buying a home, use our house affordability calculator to help estimate how much house you can afford based on your income, debt obligations, and the details of your home loan. Consult your financial advisor to determine if this estimate makes sense with your circumstances.

Home affordability calculator

This calculator is for illustrative and educational purposes only. Its accuracy and applicability to your circumstances is not guaranteed. You may wish to consult your own advisor regarding your particular circumstances.

How much do you need for a down payment on a house?

The minimum down payment you need for a house varies by the mortgage type. Twenty percent is a typical amount for a down payment. So, for a $300,000 home, you're looking at a down payment of $60,000. Since most people don't have that much in savings, it's generally easy to find a mortgage that requires less than 20% down. Some may qualify for a mortgage with a low down payment of 3.5% (for a $300,000 home, that's $10,500.) However, making a down payment of less than 20% usually means you'll need to pay private mortgage insurance, or PMI.

PMI protects the lender against the possibility of a default. You typically need to pay this insurance until you reach 20% equity in the home. However, once you've reached that, you can request that the insurance be dropped.

Conventional loans vs. FHA loans: Which should I consider?

It's important to know the difference between the two main types of home loans as they can differ in required down payment and qualifications. A conventional loan is the kind of loan most often offered by banks. A private lender provides these loans rather than a government agency. If you put down less than 20% for your down payment, a conventional loan will typically require PMI.

An FHA loan (Federal Housing Administration) is backed by the government and the FHA itself. These loans are helpful for buyers who fall into the low to moderate-income range. FHA loans have more lenient requirements, requiring a credit score of just 580 and allowing people who qualify to borrow up to 96.5% of the home's value. This means you only need to make a down payment of 3.5%. Even if your credit score is lower than 580, you may still qualify by making a down payment of 10%.

FHA loans also include an Annual Mortgage Insurance Premium or MIP. The MIP requires monthly payments of 0.45% to 1.1% of the loan amount for either 11 years or the length of the loan.

Other home buying expenses to consider

You should also budget a certain amount for closing costs. Closing costs average between 2% and 5% of the home's total cost. They include loan origination fees, appraisal fees, surveys, and more. You (or your realtor) can negotiate closing costs, but most buyers will end up paying at least a portion of these expenses. If you can get the seller to agree to pay most of the closing costs, you can reduce your costs a bit.

In addition to the down payment, closing costs, potential mortgage insurance, and other expenses, you should also budget for property tax and homeowners insurance. Learn how much homeowners insurance costs.