How Much House Can I Afford? The First Question in Home Ownership'/
holding piggy bank and model house in hands

If the housing bubble bust taught the average American anything, it taught us to only take on debt we can realistically afford. Living beyond your means can mean a nice house and no time to spend enjoying it because you need three jobs to afford it. So, the first question you ask yourself is how much can I afford?

Think like a lender: look at the three factors they consider and decide for yourself how much home you can realistically afford.

Factor #1: What house can I afford: Your debt-to-income ratio

This is simply how much you are obligated to pay on debt each month versus how much you make. To figure out your debt-to-income ratio (DTI), add together all of your required minimum monthly debt payments and divide it by your total monthly income. Be sure to include your projected mortgage payment, which normally includes taxes and insurance. Lenders are generally satisfied if the ratio is about 36 percent (some lenders allow a ratio of up to 43 percent). The housing payment (mortgage, taxes and insurance) alone should be no more than about 28 percent of your take-home pay.

But remember, this isn’t all about the lenders—this is about you, right? So, if you want your total DTI (including that future home mortgage) to only reach 25 percent of your income, then let your lender know how much you’re willing to take on. Maybe you can afford more, but if it’s not what you want, don’t take it on.

Factor #2: How much mortgage can I afford – Your credit score

Your credit score is a meter of your credit health. The higher your credit score, the more likely you are to receive the loan you want at the interest rate you want. FICO credit scores, which range from 300-850, are used by most lenders, and generally a score of 760 or above will net you the best interest rate and terms on your loan. To make sure your credit is in the best shape before you apply for a mortgage loan, it’s a good idea to pull all three copies of your credit reports to verify that the information is accurate and up-to-date. You can do this for free at the government-authorized website

After you’ve verified that your credit reports are accurate, you’ll need to pull your credit scores to see where you line up. Unfortunately, you’ll have to pay to get your FICO scores but even then, the score you see may not be the exact score your lender uses. To get a general idea of where your score stands for free, you can get your free credit score from Credit Sesame. If there are credit report errors artificially lowering your score, fix those before going to a lender. If your score isn’t where it needs to be to get the best rates, you should work on boosting your score before applying for a loan. Credit Sesame’s free monthly credit score updates can also help you monitor and track your progress without spending a dime. Putting yourself in the best possible standing before heading to the lender’s office will give you the confidence to get the terms you want. And since you’ll be carrying this loan for a decade or more, it’s worth waiting six to 12 months to make sure you’re not paying more than you should.

Factor #3: What house can I afford: Your down payment

Your down payment is a major factor in how much house you can afford. Your down payment is also a factor in what types of mortgage products you’re eligible for and can potentially score you a lower mortgage rate, so the down payment must be considered carefully. Technically, depending on the type of mortgage, lenders will accept as little as 3.5 percent of the total mortgage as a down payment. Some will even cover the closing costs in the home loan. However, these options usually mean adding other costs, such as the costs of interest on the closing costs over the life of the loan, or adding private mortgage insurance (PMI) to your mortgage. The conservative estimate as to how much a down payment should be with a traditional mortgage is 20 percent. Even for a more moderately priced home of $200,000, that’s a $40,000 down payment—not chump change. While some lenders have mortgage products with “zero money down,” this used-car salesman push should raise red warning flags that there will be costs to make up for it elsewhere. In the end, though, it is your decision as to how much of a down payment you can pull together and to determine whether or not it’s worth your while to wait and save more, or act now and possibly pay more on the back end.

In any case, going to the lender knowing what you are capable of affording and what you bring to the table in terms of credit score and down payment puts the power in your hands. The lender, of course, gets to say what you’re eligible for, but only you decide what terms you’re willing to accept. Deciding this beforehand makes it less likely that you’ll be pushed into a product with which you’re not comfortable, so use the factors above to answer the question “how much house can I afford” before going to a lender.

Finding the Right Mortgage for You

Finding the right loan is no easy task. With teaser mortgage interest rates and monthly savings across the web, how do you know if the mortgage rate you are applying for really fits with your credit profile and your budget? Credit Sesame’s analytics engine analyzes your credit history and debt picture against national lender mortgage rates to find you personalized mortgage offers for which you actually pre-qualify, suite your budget and are best matched with your financial goals.

Use Credit Sesame’s free mortgage analysis tools to find the lowest mortgage rates that you qualify for based upon your specific down payment and financial needs. Credit Sesame also gives you access to your free credit score, free credit monitoring with real-time alerts, plus $50,000 in identity theft insurance and fraud resolution assistance — for free. Sign up today »

You can trust that we maintain strict editorial integrity in our writing and assessments; however, we receive compensation when you click on links to products from our partners and get approved.
Published July 16, 2012 Updated: May 9, 2016
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