How Much House Can I Afford?

There are really two answers to this question: what a lender may approve, and what actually feels comfortable for you. I always want to look at both.

How lenders look at it

The main measure lenders use is your debt-to-income ratio (DTI). That's your total monthly debt payments, including the new housing payment, divided by your gross monthly income.

The housing payment includes more than principal and interest:

• Principal and interest
• Property taxes
• Homeowners insurance
• Mortgage insurance, if any
• HOA dues, if any

Other debts include car payments, student loans, minimum credit card payments and any other installment loans. Everyday expenses like groceries, utilities and childcare aren't counted, which is one reason a lender's maximum can feel high.

Maximum DTI depends on the loan program, credit profile, reserves and the lender's own guidelines. There isn't one universal number.

A simple example

These numbers are for illustration only. Say your household earns $15,000 a month before taxes, and you have a $600 car payment and $200 in minimum credit card payments.

If a program allowed a 45% DTI, your total debts could be up to $6,750 a month. Subtract the $800 in other debts, and that leaves about $5,950 for the full housing payment, including taxes and insurance.

Whether $5,950 a month feels right is a separate question.

How to think about your own number

Lender guidelines don't know about your goals. I'd encourage you to consider:

• Your take-home pay, not just gross income
• Savings goals: retirement contributions, college funds, an emergency cushion
• Upcoming changes: a growing family, a job change, a car that needs replacing
• Cash after closing: draining every dollar for the down payment can leave you exposed
• Maintenance: older homes especially need ongoing care

Sometimes the right answer is a lower purchase price than the maximum. Sometimes it's a different loan structure. It's worth looking at a few scenarios side by side.

California-specific costs to factor in

• Property taxes: under Prop 13, the base rate is roughly 1% of the purchase price, but many areas add local assessments or Mello-Roos, so the total can be noticeably higher. Check the actual tax rate for each property. More in how property taxes affect your payment.
• Homeowners insurance: costs and availability vary by area. Get quotes early, especially in wildfire-prone areas.
• HOA dues: common for condos and many newer communities. They count toward your DTI.

Down payment and loan type matter

A larger down payment lowers your loan amount and may lower or remove mortgage insurance. But it also uses cash you might want in reserve. Different programs have different down payment and DTI guidelines. See how much you need for a down payment.

Try a few scenarios

The mortgage calculator lets you change the price, down payment, rate, taxes and insurance to see how the payment moves. Use an example rate and adjust from there; your actual rate depends on your situation and the market.

Questions?

If you'd like help finding a number that fits both the guidelines and your life, contact me. When you're ready for a real answer based on your documents, start your pre-approval.