How Much House Can I Afford

There is no universal formula you can apply to determine how much house you can afford. The answer depends on your own financial situation and what a lender is willing to approve for you to spend. The two key questions to ask yourself are: "How much house can I afford?" and "How much mortgage can I qualify for?"

It’s important to understand that these two answers are not the same thing. Understanding how they differ will help you ensure that you can maintain your monthly budget while owning a house that satisfies as many of your needs as possible.

Read on to learn key affordability rules and read real-life examples to help you on your home-buying journey.

Two Ways to Think About Home Affordability

When answering the question, “How much house can I afford?” people often look to one of two numbers: the calculation of what they have budgeted for housing, and the amount that a lender will approve them to borrow. We might refer to these two calculations as “budget-based affordability” and “lender-based affordability.”

Smart homebuyers focus on what they can truly afford, not just what a lender is willing to offer. Budget-based affordability is the safer choice because lenders may approve you for a loan that stretches your finances, leaving little room for other expenses.

Curious what your monthly mortgage payment might look like? Try our easy-to-use Mortgage Payment Calculator to explore different scenarios and find a payment that fits your budget.

Budget-Based Rules of Thumb

Budget-based affordability is all about ensuring your new home fits comfortably into your monthly budget, not just whether it aligns with your loan pre-approval. The following rules of thumb can help you answer the question “How much house can I afford?” without compromising your financial well-being.

• Save a down payment of 10–20% of the home price: You may be able to secure a loan that does not require this large a down payment, but putting more down will reduce your loan amount, interest rate, monthly payment and potential mortgage insurance premiums.
  Why it matters: A higher down payment makes your new home more affordable.

• Limit your mortgage payment to 25% of your take-home pay: Strive to have all elements of your monthly mortgage payment, including principal, interest, taxes, insurance and HOA fees, add up to no more than 25% of your monthly take-home pay. This allows you to reserve a substantial amount of income to cover other expenses, save for the future and prepare for emergencies.
  Why it matters: Limiting housing costs leaves room for everything else in your budget.

• Build lifestyle changes into your budget: Moving may increase your spending on lifestyle factors like commuting, childcare, utilities or maintenance, so it’s important to think through any such changes and include them in your new budget picture.
  Why it matters: These additional factors can make an otherwise affordable home unattainable.

• Keep a three-to six-month emergency fund: Resist the urge to put every penny of your savings toward a down payment. It is wise to maintain a robust emergency fund that can cover the unexpected but inevitable repairs and maintenance costs associated with your new home.
  Why it matters: Maintaining some liquidity protects you from financial stress.

Lender-Based Affordability Factors

Lender-based affordability — that is, how much a financial institution will approve you to borrow for a mortgage — is based on a risk assessment of how likely you are to repay the loan in full. Each lender has its own guidelines and formulas, but most use the same core factors to evaluate loan applications.

• Debt-to-income ratio (DTI): DTI is a calculation that sizes up your monthly debt payments against your gross monthly income. Most lenders look for a total DTI below 43%, though some lenders may allow for higher DTIs. Why it matters: A lower DTI will increase your chances of being approved for a larger mortgage loan.

• Credit score: Your personal credit score impacts your loan approval amount and the interest rate you will be offered. Higher scores typically bring you better terms and higher loan amounts. 
  Why it matters: A higher credit score makes your home more affordable via lower rates.

• Loan term: Most borrowers get a 30-year mortgage, which comes with lower monthly payments than a 15-year loan. A shorter loan allows you to build equity faster but requires higher payments and limits how much house you can afford. 
  Why it matters: Longer terms boost affordability as well as the total interest paid over time.

• Loan-to-value (LTV): LTV is a measure of the loan amount compared to the home’s value. Since a lower LTV reduces lender risk, you may get better terms if you put down a large down payment to reduce the amount you are borrowing for your home. 
  Why it matters: Putting more money down can translate to better interest rates.

Real-Life Scenarios: Home Affordability in Action

Scenario 1: Single Buyer in Florida

Profile: Single, $60,000 income, $400 monthly debt, $20,000 saved

Budget perspective: If this buyer is to limit the mortgage cost to 25% of take-home pay, they will have to stick to a monthly payment of around $1,100. This payment will support only a modest Florida home price.

Lender perspective: The buyer has manageable DTI and solid savings, so they may qualify for a higher amount than their budget can reasonably allow.

Takeaway: For this homeowner, answering the question “How much house can I afford in Florida?” depends on prioritizing a balanced budget by limiting cost.

Scenario 2: Couple in Florida

Profile: Couple, $120,000 combined income, no debt, $10,000 saved

Budget perspective: These buyers have a relatively high income, which allows for higher monthly payments; however, their limited savings result in a lower down payment, restricting the houses they can afford.

Lender perspective: These buyers’ excellent DTI means they can get a higher loan amount despite having a smaller down payment, so they may end up approved for more borrowing than they can safely take on.

Takeaway: When considering “How much can I afford for a house?” this couple will find they can buy a more expensive home than they may have expected, but they will need to be careful to maintain liquidity.

Scenario 3: Self-Employed Buyer in Georgia

Profile: Self-employed, $90,000 income, $600 monthly debt, $5,000 saved

Budget perspective: This buyer has a relatively high monthly debt-to-service ratio and a somewhat low amount saved for a down payment, which may reduce their comfort with a higher price and lead them to a more conservative purchase.

Lender perspective: This buyer’s income, debt and savings situation may result in a high DTI and limit the approval amount they can get.

Takeaway: When asking, “How much house can I afford in Georgia?” this buyer will want to closely examine their income, debt and down payment amounts.

Find Out What You Can Afford with Seacoast Today

Ready to take the next step? Connect with Seacoast’s experienced mortgage professionals to get personalized guidance on your home affordability and financing options.