What you can afford comes down to your income, your monthly debts, your down payment and the interest rate. Lenders compare your total monthly debts, including the new house payment, with your gross monthly income. The right number for you is a payment you are comfortable with, which may be less than the most a lender would approve.
A house payment has more in it than the loan. Property taxes, homeowners insurance and, on many loans, mortgage insurance are collected with it each month. A home with higher taxes or an association fee costs more per month than the price alone suggests.
Lenders look at your debt-to-income ratio: the share of your gross monthly income that goes to debt payments. Car loans, student loans and credit card minimums all count. Lowering a monthly debt can raise what you qualify for.
Being approved for an amount does not mean you should spend it. Decide what monthly payment leaves room for the rest of your life, then work backward to a price.
Related questions
Does my down payment change how much I can afford?
Yes. A larger down payment means a smaller loan and a lower payment at the same price. It can also reduce or remove mortgage insurance.
Do lenders use my income before or after taxes?
Before taxes. Qualifying ratios are based on gross monthly income, which is one reason your own budget matters as much as the approval.
Should I pay off debt before buying?
It can help, since lower monthly debts improve your ratio. Which debt to pay, and whether to keep the cash for closing instead, depends on your situation.
