A First-Time Buyer’s Roadmap to Understanding Your Budget

You probably have a lot of questions. The most important one at the start of your home buying journey is “How much house can I afford?” Fortunately, there are simple guidelines you can use to give yourself a clear range. With that in hand, you’ll be ready to begin your house hunt!

What Determines Home Affordability?

A home is affordable if you can pay your mortgage and other house-related expenses and still have enough left over to cover your other debts (such as credit card payments or student loans).

The 28/36 Rule

The 28/36 rule is a basic measure of home affordability that lenders frequently use:

• ✅ Housing Costs: Your total monthly housing costs shouldn’t exceed 28% of your gross monthly income.

• ✅ Total Debt: Your total monthly debt payments (including housing) shouldn’t exceed 36% of your gross monthly income.

Example:If you earn $5,000 per month before taxes:

• Your housing costs should stay under $1,400 (28% of $5,000).

• Your total debt payments should stay below $1,800 (36% of $5,000).

How Do Lenders Decide Home Affordability?

Lenders use a few key factors to determine how much house you can afford:

• Income – Your housing expenses (mortgage, property taxes, insurance) should stay at or below 28% of your gross monthly income.

• Existing Debt – Lenders look for a debt-to-income ratio under 36%, including your mortgage and other obligations like car loans or credit card payments.

• Credit Score – A higher credit score means better interest rates and a higher potential home budget.

  • 740+ : Best rates available

  • 680–739 : Good rates

  • 620–679 : Higher rates

  • Under 620 : Financing may be harder to get, but some specialized programs may help.

• Down Payment – The larger your down payment, the less you need to borrow, reducing your monthly payments and potentially removing the need for private mortgage insurance.

• Interest Rates – Even a 1% increase in mortgage rates can raise your monthly payment by hundreds of dollars, so staying updated on rates is important.

Calculating Your Monthly Mortgage Payment

Knowing your estimated monthly payment helps you set a realistic budget.

Key Components of a Mortgage Payment:

• Principal and Interest – Principal is the loan amount; interest is the cost of borrowing. Over time, more of your payment goes toward principal.

• Property Taxes – Typically 1% to 2% of your home’s value annually (varies by location).

• Homeowners Insurance – Required by lenders to protect your home and belongings.

• Private Mortgage Insurance (PMI) – Required if your down payment is less than 20%. Usually 0.3% to 1.5% of the loan amount annually.

Formula for Monthly Payment:

If you want to calculate it yourself:

M = P [ r(1 + r)^n ] / [ (1 + r)^n – 1]

Where:

• M = Monthly payment

• P = Loan amount

• r = Monthly interest rate (annual rate ÷ 12)

• n = Total number of payments (loan term × 12)

(Or use a mortgage calculator for quick estimates.)

Improving Your Home Affordability

Want to afford more house? Try these strategies:

• Boost Your Credit Score: Pay down debts, make on-time payments, avoid opening new credit, and correct any credit report errors.

• Save for a Larger Down Payment: A bigger down payment lowers monthly payments and may eliminate the need for PMI.

Bottom Line

Buying your first home can feel overwhelming, but you’re not alone—many homeowners have successfully taken this step. Start by figuring out “How much house can I afford?” and work with a trusted real estate professional to guide you through the process.