How Much Home Can I Afford?

Getting preapproved for a mortgage is an exciting milestone. For many, it’s the first real step on the way to homeownership. The preapproval amount gives you a clear price range and shows sellers that you’re a serious homebuyer. And, a mortgage preapproval helps you answer an important question: “How much home can I afford?”

Your preapproval amount represents what you could borrow, but your ideal home budget might be less than that. It’s important to think about your financial goals to decide what monthly payment amount makes sense for you.

10 factors to consider when determining home affordability

Understanding how much home you can afford goes beyond looking at the price. Let’s walk through several factors that can affect your home-buying budget and help you find out how much home you can afford.

1. Your income stability

Steady income is the foundation of a reasonable home-buying budget. Consider the full picture of your income when planning your budget, including:

• job security and stability of your industry
• income gaps or seasonal changes in your earnings
• base salary versus variable pay such as commissions or bonuses
• potential promotions and raises
• additional income sources such as investments or gig work
• changes that could affect household income such as switching careers or starting a family

2. Your current monthly debts

How much of your income is already earmarked for planned expenses? Evaluate your existing financial commitments and debt-to-income (DTI) ratio to decide how much room you have in your monthly budget for a mortgage payment. Review all your monthly obligations, including:

• vehicle loans or lease payments
• student loan payments
• credit card payments
• personal loan payments

3. The size of your down payment

Your down payment choice plays a significant role in your monthly costs and long-term financial picture. A 20% down payment offer may provide certain advantages: immediate equity in your home, eligibility for lower interest rates and avoiding paying private mortgage insurance (PMI). 

As a representative example, let’s say you want to buy a $300,000 home and qualify for 7% interest on a 30-year fixed conventional mortgage loan. Here is a comparison of how different down payment amounts would affect your monthly mortgage bill:

• If you make a 20% down payment ($60,000), then your monthly principal and interest payment would be $1,597. 
• If you only make a 5% down payment ($15,000), then your monthly payment would jump to $1,896. In this scenario, you’d be paying nearly $300 more each month, plus additional PMI costs. Note: Taxes and insurance not included; therefore the actual payment obligation will be greater.

Some lenders offer loans that can help you get into a home without a big down payment. For example, if you qualify for an FHA loan or a VA loan, you might only need to put down no more than 3.5%.

4. Your lifestyle and goals

Your mortgage payment should leave room for the life you want to live, both now and in the future. Consider how your monthly housing costs will fit with other priorities, which may include building retirement savings, traveling to visit family, enjoying hobbies or saving for your children’s college education. 

Think about upcoming life changes, too. If you’re planning to start a business, switch careers or grow your family, a comfortable mortgage payment may give you the freedom to establish a strong foundation.

5. The interest rates you qualify for

Your mortgage interest rate may impact your monthly payment and how much home you can afford. With a strong credit score (720 or higher), you’ll qualify for better mortgage rates.

You’ll also want to compare fixed- and variable-interest rate options. Variable rates can change over time, which could save you money now but potentially cost you more later. 

As a representative example, on a $300,000 loan, the difference between a fixed 6.5% rate mortgage and a fixed 7% rate mortgage is $100 per month, or $36,000 over a 30-year term. Note: Taxes and insurance not included; therefore the actual payment obligation will be greater.

6. Mortgage loan terms and options

The standard term length for a mortgage is 30 years. If you opt for a shorter term, such as 15 or 20 years, you may get a lower interest rate and pay less in interest in the long run. However, your monthly payments would be higher because you’re paying off the loan faster. 

As a representative example, a $300,000 loan at 7% interest would have a monthly payment of $1,995 with a 30-year loan. With a 15-year loan, you’d pay $2,696 each month. Note: Taxes and insurance not included; therefore the actual payment obligation will be greater.

7. Your closing costs

Plan for the one-time expenses you’ll need to cover when finalizing your home purchase. Closing costs typically range from 3-6% of your loan amount. On a $300,000 home purchase, you’d expect to set aside $6,000 to $15,000 in addition to your down payment to cover closing costs, which typically include:

• home inspection and appraisal fees
• title search and insurance
• loan origination fees
• property taxes 
• insurance prepayments

8. Your new home’s location

Where you buy property affects both your purchase price and its ongoing expenses, such as the property tax rate. For example, a $300,000 home might have annual taxes of $3,000 in one county but $6,000 in another. Your location also influences insurance rates, utilities and daily expenses. Research the areas you’re considering to understand the expected cost of living. 

9. Your insurance needs

Homeowners insurance protects your investment. Costs vary based on factors like your home’s location, age and features. Plan for annual premiums between $1,450 and $5,287 per year for a typical home. 

Some locations require additional coverage, like flood insurance in coastal areas or earthquake coverage in certain regions. If you’re considering a condo or planned community, factor in any required HOA insurance, too. Get insurance quotes for properties you’re seriously considering so you can budget accordingly.

10. Your home maintenance fund

Consider setting aside 1-4% of your home’s value each year for maintenance and repairs. For a $300,000 home, that means budgeting $250 to $1,000 monthly for everything from routine upkeep to unexpected fixes. Some costs you may encounter include: 

• replacing a water heater ($1,000-$3,000)
• installing a new HVAC system ($5,000-$10,000)
• replacing the roof ($8,000-$20,000)

3 steps to calculate your home budget

Wondering how much house you can afford within the limits of your mortgage preapproval amount? Here are 3 steps you can take to estimate your costs so you can keep homeownership within your range of affordability.

1. Add up your current monthly expenses

Add up your current housing costs (your rent or mortgage), utilities and insurance. Include all regular bills such as car payments, student loans and credit cards. Don’t forget to account for discretionary spending, plus what you set aside for savings goals and retirement. 

2. Estimate your new homeownership costs

Research property tax rates in areas you’re considering and get quotes for homeowners’ insurance. If you’re looking at planned communities, factor in HOA fees. Plan to set aside money monthly for maintenance, utilities and emergency expenses related to your home.

3. Test different monthly payment scenarios

Use a mortgage calculator to test various home prices with different down payment amounts and current interest rates. Aim to keep your total housing costs under 28% of your monthly income, with all debt payments staying under 36% of your income. 

Focus on your home-buying goals with Navy Federal Credit Union

Finding the right balance between the home you want and a payment you’ll feel good about can help give you peace of mind as a homeowner. Navy Federal is here to help you make confident decisions about your home purchase, from estimating costs to choosing the right mortgage. Connect with our mortgage specialists to explore your options and take the next step toward homeownership.