How Much House Can You Actually Afford?

Getting preapproved for a mortgage gives you a clearer idea of what a lender is willing to lend you. But that number is not necessarily the same as what you should spend on a home.

Your actual budget has to account for more than the mortgage itself. So how do you figure out what price range makes sense for you?

The monthly payment is a better place to begin than the purchase price alone.

Your total housing payment can include principal and interest on the mortgage, property taxes, homeowners insurance, mortgage insurance, and homeowners association fees, if applicable. Some of these costs can vary depending on the property and loan, so a home that looks affordable based only on its listing price may have a very different monthly cost once everything is included.

Your income and existing expenses matter just as much.

The Consumer Financial Protection Bureau (CFPB) recommends looking at your income, expenses, savings, and other financial priorities when deciding what you can comfortably afford. Two people with the same income could reasonably choose very different home prices depending on their other financial commitments and goals.

Lenders look at some of those same numbers when deciding how much they are willing to lend. One common measure is the debt-to-income ratio (DTI), which compares your monthly debt payments with your gross monthly income. The calculation includes your housing payment along with debts such as car loans, student loans, and credit card payments. Different loan programs and lenders have different DTI requirements, so there is not one percentage that applies to every buyer.

Interest rates change the equation, too.

For the same loan amount and term, a higher interest rate means a higher monthly principal-and-interest payment. Your down payment also affects the amount you need to finance, and putting less than 20% down will often mean paying mortgage insurance, depending on the loan.

Then there are the costs that come with owning the home after you close.

Repairs, maintenance, utilities, and unexpected expenses can all affect your budget. Keeping some money available for emergencies and continuing to save for other goals can be just as important as making the monthly mortgage payment.

That is why mortgage preapproval should be viewed as one piece of the affordability picture, rather than the final answer. The amount a lender is willing to approve tells you what you may be able to borrow. Your own budget tells you what you can realistically live with.

When you are deciding how much house you can afford, look at the full monthly cost, your other debts, your upfront cash, and the financial goals you want to continue pursuing after you become a homeowner.

The right price range is not necessarily the highest one you can qualify for. It is the one that allows you to own the home without making the rest of your budget uncomfortably tight.