How Much House Can I Afford?

Understanding your buying power is the essential first step in the home search. Here's how to think about affordability realistically.

The Two Questions

1. What will lenders approve you for? (The maximum)
2. What can you comfortably afford? (The smart number)

These are often different amounts. Just because you're approved for $400,000 doesn't mean you should spend $400,000.

How Lenders Calculate Affordability

Debt-to-Income Ratios (DTI)

Lenders look at two DTI ratios:

Front-end ratio (housing ratio): Your monthly housing costs divided by gross monthly income.

• Includes: Principal, interest, taxes, insurance (PITI), HOA fees
• Most lenders want this at 28% or below

Back-end ratio (total DTI): All monthly debt payments divided by gross monthly income.

• Includes: Housing costs PLUS car payments, student loans, credit cards, etc.
• Most lenders want this at 43% or below (some programs allow higher)

Example Calculation

Monthly gross income: $8,000

Front-end limit (28%): $8,000 × 0.28 = $2,240 max housing payment

Back-end limit (43%): $8,000 × 0.43 = $3,440 max total debt If you have $600/month in other debts: $3,440 - $600 = $2,840 max housing payment

In this example, the front-end ratio is the limiting factor at $2,240.

Beyond the Ratios

What the Ratios Miss

• Utility costs (varies significantly by home size and age)
• Maintenance and repairs (budget 1-2% of home value annually)
• Commute costs if location changes
• Lifestyle expenses the ratios don't consider
• Future financial goals (retirement, education, etc.)

The Comfortable Number

Many financial advisors suggest spending no more than 25% of your take-home pay on housing. This gives you more margin for:

• Building emergency savings
• Handling unexpected repairs
• Enjoying life beyond your mortgage payment
• Weathering income disruptions

Down Payment Realities

How Much Do You Need?

Loan Type	Minimum Down Payment
Conventional	3% (with PMI)
FHA	3.5%
VA	0%
USDA	0%

But minimum isn't always optimal:

Lower down payment:

• Preserves cash reserves
• Gets you into a home sooner
• Higher monthly payment (PMI, larger loan)

Higher down payment:

• Lower monthly payment
• No PMI at 20%
• Less cash on hand
• May not be worth waiting years to save more

Don't Forget Closing Costs

Beyond the down payment, budget for closing costs:

• Typically 2-4% of the purchase price
• Includes loan fees, title insurance, escrow setup, etc.
• Some can be negotiated as seller concessions
• Your lender will provide an estimate

The Real Question

Rather than "how much can I afford," consider:

"What payment lets me live the life I want while still building wealth through homeownership?"

A home you love but can't comfortably afford becomes a burden. A home that fits your budget becomes a foundation for financial growth.

Getting Specific

Online calculators provide general estimates, but for accurate numbers:

1. Get pre-approved with a lender
2. Understand your specific loan options
3. Factor in your complete financial picture
4. Consider your long-term goals

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Ready to understand your buying power? Contact Greg Franklin or call (559) 816-7780 for lender recommendations and next steps.