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How much mortgage can I afford with my salary?

Are you consistent with your rent payments? Do you have job security? Have you built credit history and improved your credit score? If so, now might be a good time to buy your first home. But before you venture out into the housing market, you may want to figure out how much mortgage you can afford with your current salary.

It’s important to understand that the cost of homeownership isn’t limited to just your monthly mortgage payments. If your goal is to purchase a home that you can afford to buy and keep, consider the impact of other factors such as your down payment, debt and household expenses.

Which factors determine how much mortgage I can afford with my salary?

The decision to buy a home should be based on the following factors, which can affect your ability to afford the monthly mortgage payment on your salary.

  • 1. Sales price of the home

    The price of the home you want to purchase is obviously one of the biggest factors in determining how much your monthly mortgage will be and how much home you can afford.

  • 2. Down payment amount

    A down payment is a portion of your home purchase price paid upfront. When you take out a mortgage, you’ll typically pay your down payment on closing day, with the remaining cost of the home paid in monthly installments. The amount of your down payment will vary depending on the lessor of your home’s appraised value or purchase price, the type of loan and your credit history.

    With affordable lending programs, low or no down payment options are available. However, the advantages of a larger down payment may include a lower monthly payment and a better interest rate.

  • 3. Estimated interest rate

    Several factors affect how your interest rate is determined. These include down payment amount, home price, loan term, type of loan program, credit score, home location, fixed-rate versus an adjustable-rate mortgage and discount points.

    Interest rates can significantly impact your monthly mortgage payment and the amount of home you can afford. The lower your rate, the lower your payment. Learn more about how to get a better mortgage interest rate.

  • 4. Total monthly debts

    In addition to your credit score and credit history, your debt-to-income ratio (DTI) plays a significant role in your ability to secure a loan and how much mortgage you can afford. To calculate your DTI, add up your monthly debt payments and divide them by your monthly income before taxes.

  • 5. Common expenses

    Your homeownership budget should take into consideration more than your monthly principal and interest payments. Take a few minutes to make a list of what you’ll need to spend monthly on household expenses to help determine how much home you can afford. These fees may be new to you if you’re making a move from renting to owning as a first-time homebuyer.

    Ongoing costs can include property taxes, homeowner’s insurance, utilities, maintenance, home repairs and HOA fees. Also, don’t forget to include one-time fees such as closing costs and moving expenses.

  • 6. Loan term

    Fixed-rate loan terms range from 10-30 years. An ARM starts with an introductory fixed interest rate for a period of 7 or 10 years, then adjusts after the introductory fixed interest rate period ends—generally, the shorter the loan term, the higher your monthly payments.

  • 7. State where your property is located

    Since property tax, hazard insurance, utilities and cost of living vary by state, the location of your new home can affect how much mortgage you can afford.

Will my credit score affect how much mortgage I can afford with my salary?

Lenders look at more than just debt and income level when applying for a mortgage. They will also check your credit score, look at your employment history and take your assets and liabilities into account. The higher your score, the less of a risk you pose to a lender, and therefore the more likely you’ll be approved for a loan. A high credit score may also qualify you for a lower interest rate and a larger loan amount.

How do I know what mortgage interest rate to put into a mortgage affordability calculator?

The combination of seven different factors determines your mortgage interest rate. While your credit score is a primary factor that can help give you a ballpark of your interest rate, home location, home price and loan amount, down payment, loan term, interest rate type and loan type also affect your rate.

Mortgage rates can change daily, and every borrower’s situation is unique. Consult with a loan officer who will assess your credit score and other factors and provide an estimated interest rate to put into a mortgage affordability calculator.

How much do credit card balances and other loan payments affect mortgage affordability?

All your debt, including your credit card balances and other loan payments, play a significant role in how much mortgage you can afford. While there’s no perfect formula, in general, your monthly mortgage payment plus housing costs should be no more than 36% of your pretax monthly salary. However, this number can change based on your debts. If your combined monthly debts exceed 50% of your income, you may have trouble qualifying for a conventional loan.

Use Guild’s mortgage income calculator to estimate how much mortgage you can afford on your salary

Our income needed calculator estimates the annual income required to buy a home by looking at the size of the mortgage, monthly debt payments, interest rate, loan terms and the related homebuying expenses.

Did you determine that your salary is in line with the income needed to qualify for the home you want to purchase? Your recommended next step is to get a more accurate estimate by requesting pre-approval. If the monthly income required is more than your salary, we can help navigate your options. Connect with a loan officer to review the best loan program for your situation.

The above information is for educational purposes only. All information, loan programs and interest rates are subject to change without notice. All loans subject to underwriter approval. Terms and conditions apply. Always consult an accountant or tax advisor for full eligibility requirements on tax deduction.

By |Published On: March 23rd, 2022|Categories: Guild Blog, Mortgage 101|Tags: , , , |

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About the Author: Guild Mortgage

Founded in 1960 when the modern U.S. mortgage industry was just forming, Guild Mortgage Company is a nationally recognized independent mortgage lender providing residential mortgage products and local in-house origination and servicing. Guild’s collaborative culture and commitment to diversity and inclusion enable it to deliver a personalized experience for each customer. With more than 4,000 employees and over 250 retail branches, Guild has relationships with credit unions, community banks, and other financial institutions and services loans in 49 states and the District of Columbia. Guild’s highly trained loan professionals are experienced in government-sponsored programs such as FHA, VA, USDA, down payment assistance programs and other specialized loan programs. Guild Mortgage Company is a wholly owned subsidiary of Guild Holdings Company, whose shares of Class A common stock trade on the New York Stock Exchange under the symbol GHLD.