5 factors that affect how much house you can afford

Your credit score affects your borrowing power

Your credit score is like a report card for your borrowing history: Lenders look at your credit score to see how trustworthy you are when it comes to paying off debts. A high credit score gives you access to better borrowing opportunities, while a low credit score can make it hard to borrow at all. When you’re looking to get approved for a home mortgage, be sure you:

• Know your credit score and the main factors influencing it
• Avoid making these credit score mistakes

Debt-to-income ratio (DTI) can be a good measure

Your DTI is the amount of your income going toward debt payments—including your mortgage. You can figure out your DTI by dividing your monthly debt payments by your monthly gross income (which is your total income before taxes and other deductions—not your take-home pay). Student loans, car payments, and credit card bills all factor into this equation. While everyone’s situation is different, a general recommendation is to keep your DTI below 36% of your income—so if your gross income is $7,500 per month, your debt payments (mortgage included), shouldn’t total more than $2,700. 

The down payment determines a lot

Before you move in, you’ll have to sign a big check (or two). Some buyers may be able to get a mortgage with no down payment, but for most first-time buyers, 3% down is usually the minimum required. A bigger down payment can help you get a better interest rate and—if you put at least 20% down—avoid paying for private mortgage insurance (PMI). It can also help your offer stand out from other homebuyers in competitive markets. You’ll need to rely on your savings for this step—but your down payment shouldn’t come from your emergency fund. In June 2021, the average down payment for a home was $27,850.^{Disclosure 1}

Closing costs are sometimes overlooked

Other than the down payment, one of the biggest upfront payments you’ll make when buying a home is to cover the closing costs, which include necessities like insurance, attorney fees, and an initial property tax payment. Closing costs typically run 2–5% of the price of a home—so a $250,000 home could require $5,000–$12,500 in closing costs. 

Monthly mortgage payments need to be manageable

You should enjoy your new home, not worry about affording expenses after you pay your mortgage. Federal lender Freddie Mac suggests that you spend no more than 28% of your monthly pretax income on your mortgage payments—including the principal, interest, taxes, and insurance. (For example, if your gross income is $7,500 per month, that’d be $2,100.)