How Much Mortgage Can I Afford?: A Home Buying Budget Guide

With average mortgage rates hovering around 6.25% as of March 13, 2024, according to Freddie Mac, you might wonder how much mortgage you can afford. After all, the slightest mortgage rate change can have a major impact on your home purchase budget.

To know what to expect in today’s housing market, let’s dive into what affects your homebuying budget and how to increase it.

Home Affordability Calculator

Determining how much you can pay for a house starts with setting a budget for buying a home. This involves counting your annual income, monthly expenses, and cash for a down payment and other upfront homebuying costs. Keep in mind that your house budget will also vary based on your credit score, monthly debt, and where you want to buy. For an idea of where you stand, try this Home Affordability Calculator from our friends at Rocket Mortgage^®. You’ll input your desired purchase location, yearly income, any savings you have to put toward a house, estimated monthly debt and your credit score to get an estimate on how much house you could afford.

Should You Follow The 28/36 Rule?

Another way to quickly estimate your home purchase budget is to follow the 28/36 rule, aka the percentage-of-income rule. The guideline suggests that you spend no more than 28% of your gross income on housing and no more than 36% on all debt, including mortgages, car loans, credit cards, etc.

For example, if you earn $7,000 per month, the rule says you could put up to $1,960 toward your monthly house payment and up to $2,520 toward all debt (including your mortgage). That doesn’t mean you should spend that much on housing and debt. It’s just an upper limit. You may want to spend less to free up more income for other things.

Note that lenders often use the 28/36 rule when determining how much credit to extend to borrowers (while also considering other factors). By meeting the 28/36 rule proactively, you may have a better chance of qualifying for a favorable mortgage.

What Affects How Much House You Can Afford?

How much you can afford to spend on a house and the mortgage amount you can qualify for depend on many factors.

• Location: Property values can vary dramatically from one location to another. For example, according to the National Association of REALTORS® (NAR), in Q4 2024, the median sales price for an existing single-family home in St. Louis, Missouri was $243,700. In San Jose, California it was $1,750,300. Consequently, your money may go further in St. Louis than in San Jose in terms of house quality and size.
• Income: Your income directly impacts how much mortgage you can qualify for and, by extension, how much you can spend on a house. For example, according to the Rocket Mortgage^Ⓡ Home Affordability Calculator, as of February 23, 2024, if you earn $100,000 per year (and have zero existing debt, a 750 credit score, and $20,000 for a down payment), you may qualify for a $347,427 mortgage in Salt Lake City, Utah. If you earn $70,000 per year, you’d qualify for a $248,244 mortgage (all else equal).  
• Credit score: Lenders use credit scores, typically a FICO^® Score, which range from 300 to 850, to gauge borrowers’ creditworthiness. A higher credit score reflects a lower risk to the lender, as you’re seen as more capable of handling debts responsibly. Consequently, lenders are generally willing to lend more to those with higher credit scores (and vice versa).
• Debt-to-income ratio: Your debt-to-income ratio (DTI) ratio is another factor lenders consider when determining how much to lend you. It compares your monthly debt to your gross monthly income and is calculated by dividing the former by the latter. For example, if you had $2,000 in monthly debts and earned $7,000 per month, your DTI would be about 29%. Most lenders want to see a DTI of no more than 36%, although requirements vary by lender and loan type.
• Mortgage rates: Mortgage rates directly influence how much you can borrow from a mortgage lender because they alter the total cost of the loan and dictate how much interest you’ll pay over the life of the loan.
• Down payment amount: The amount you put down on a house affects how much you need to borrow to buy it. It also signals to the lender how invested you are in the property. The higher your down payment, the less likely you are to stop making payments and risk losing your home to foreclosure.
• Loan type: The type of home loan you choose also affects how much you can borrow for a house. For example, conforming loans must meet loan value limits set by the Federal Housing Finance Agency (FHFA). In 2024, that limit is $766,550 for single-family homes in most counties (but may be higher in more expensive markets). In contrast, nonconforming loans don’t have to meet FHFA standards and may allow larger loan amounts as a result. Similarly, government-backed mortgages like FHA, VA, and USDA loans have lower (or no) down payment requirements, which could make it easier to qualify for a larger mortgage than you could otherwise.
• First-time home buyer programs: First-time home buyer programs can help make a home more affordable. These could be government-backed programs such as Conventional 97 and HomeReady or non-profit programs such as Habitat for Humanity and the Neighborhood Assistance Corporation of America (NACA).

Ongoing Costs Of Homeownership To Consider

On top of factoring in the initial purchase cost, homebuyers should consider the ongoing costs of homeownership to determine how much house they can afford.

Homeowners Insurance

Often required by lenders, homeowners insurance can protect you against property damage, the loss or damage of items in your home (such as furniture and appliances), and personal liability for injuries that occur on your property.

The cost of homeowners insurance varies by your home’s value, location, and condition as well as your age, credit history, and claims history. According to Insurance.com, as of February 9, 2024, the average cost of homeowners insurance nationwide is $2,777 per year.

Property Taxes

Most homeowners must regularly pay property taxes to their local government. This is usually a percentage of their property’s current assessed value as determined by the county tax assessor’s office (or similar department), which considers the property’s location, size, age, condition, features, recent sales of comparable properties (comps), and more.

Effective property tax rates (which factor in tax exemptions, abatements, and other adjustments) can vary by state, county, and municipality. According to Tax Foundation, New Jersey had the highest effective property tax rate in 2021 (the most recent data available) at 2.23%, while Hawaii had the lowest at 0.32%.

Utility Fees

Another ongoing cost of homeownership is utility fees. These include bills to cover electricity, water, sewage disposal, natural gas, trash collection, internet, and more.

Utility costs can vary by location, climate, property size, household size, and lifestyle, but here are the average monthly utility costs in the U.S. according to Move.org:

• Electricity: $135.25
• Natural gas: $90.62
• Water: $39.16
• Sewer: $63.00
• Trash: $25-$100
• Internet: $36

Maintenance Costs

Properties require regular maintenance to stay in good shape. As a homeowner, this means you must budget for plumbing issues, lawn care, HVAC cleaning and repairs, repainting, pest control, home inspections, and similar tasks.

Of course, maintenance costs vary widely by location, house condition, household size, etc. As a rule of thumb, however, you should put away 1% – 4% of your home’s value each year for annual upkeep. On a $500,000 house, that’s $5,000 to $20,000 per year.

How To Increase How Much Home You Can Afford

If, after determining your house budget, you realize it’s smaller than you’d hoped, know that there are ways to increase your odds of being preapproved for a higher mortgage amount. This may require that you:

1. Save for a down payment. The more you put down on a property, the less you must borrow from a lender and the less risk you pose to them. As a result, those who save for a down payment may qualify for a larger mortgage amount.

2. Increase your income. Lenders like to see that you have ample income to cover your mortgage payment. By increasing your income, you show that you can afford to spend more on a house. You could do this by asking for a raise at your job or starting a side hustle.

3. Improve your credit score. A high credit score signals to lenders that you are a reliable borrower who pays off their debts in full and on time. Typically, a higher credit score means you may qualify for a lower interest rate. Fortunately, there are many ways to increase your score: paying bills on time, maintaining a low credit utilization rate, disputing errors on your credit report, keeping a mix of credit types, and more. 

4. Lower your debt. Paying off your existing debt helps lower your DTI ratio, which lenders use to determine the mortgage size you can afford. Lowering your debt could mean consolidating and refinancing loans or paying them off completely. Either way, it can help increase your house budget.

5. Add a co-borrower or co-signer. A co-borrower can increase the total income on a mortgage application and the amount for which you can be preapproved as a result. Similarly, a co-signer can back or guarantee the loan, meaning they agree to cover mortgage payments if the primary borrower defaults. This extra assurance to the lender can help increase your mortgage budget — especially if the co-signer has a strong credit history. 

Home Affordability FAQs

Here are answers to frequently asked questions on home affordability:

What are the costs of buying a home?

Buying a home has initial costs for closing, moving, the down payment, home inspection, appraisal, title search, etc. It also has ongoing costs such as the monthly mortgage payment, homeowners insurance, property taxes, utility services, and regular maintenance.

How much income should go toward a mortgage?

Guidelines suggest that you spend no more than a third of your income on a mortgage, although this can be difficult in high-cost areas. The U.S. Department of Housing and Urban Development (HUD) defines affordable housing as spending up to 30% of your gross income on housing, including utilities.

How much house can I afford based on my salary?

According to the 28/36 rule, you should spend no more than 28% of your gross income on a mortgage. With a $100,000 annual salary, the suggested maximum monthly mortgage payment would be $2,333 per month. With a $70,000 annual salary, it would be $1,633 per month.

How much house can I afford with an FHA loan?

It depends on your income, credit score, debt-to-income (DTI) ratio, and other factors. However, FHA loans cater to those with lower credit scores and smaller down payments. You may qualify for an FHA loan with a minimum credit score of 580 and a minimum down payment of 3.5%, depending on your lender. 

How much house can I afford with a VA loan?

It depends on your income, credit history, existing debt, etc. However, VA loans offer qualifying U.S. military members mortgage options with no down payment requirement, no mortgage insurance requirement, lenient credit requirements, and lower-than-average interest rates.

The Bottom Line

Ultimately, there’s a lot that goes into how much house you can afford. But your home budget isn’t fixed and you can tweak different levers to increase it. That might mean shopping in a more affordable location, improving your credit score, or paying down your existing debt.

Whatever you do, don’t be afraid to set your goals high. Then once you settle on a home budget, you can start the preapproval process with our friends at Rocket Mortgage and move one step closer to your new home.