Whether you're a first-time homebuyer or a repeat shopper, you need to crunch the numbers before committing to a home.
Your lender will tell you the maximum loan amount you qualify for, but borrowers still need to look at their finances to see what they're comfortable paying and which homes are out of their league.
CNBC Select outlines different methods to determine what you can afford in monthly mortgage payments and, ultimately, where to set your price ceiling.
CNBC Select mortgage payment calculator
The 30% rule
According to the U.S. Department of Housing and Urban Development (HUD), homebuyers should commit no more than 30% of their monthly income to housing expenses, including mortgage payments, utilities and insurance.
Many lenders use this formula when deciding whether to approve mortgage applications.
So, if you make $6,000 a month, which is just under the U.S. median household income, you should be putting no more than $1,800 toward mortgage payments, utilities and other household expenses.
As housing costs have leapfrogged ahead of wages, however, some have argued the "30% rule" is outdated: Housing expert Lashondra Graves, for example, advocates for moving the benchmark to 40% "[to] better align with today's economic realities."
The 28/36 rule
While many lenders accept applicants with a debt-to-income ratio of up to 43%, according to the 28/36 rule, you should spend no more than 36% of your monthly salary on housing, credit cards, car loans and other debts.
Of that 36%, no more than 28% should go to your mortgage and other housing costs.
So, if you earn $6,000 a month, your housing costs should be $1,680 or less, and you should be spending no more than $2,160 on bills overall.
The 3X annual income rule
Another shorthand strategy is to cap your total mortgage at three times your salary.
According to this guideline, if your household income is $80,000, you can afford to spend up to $240,000 on housing.
What goes into your mortgage payment?
Income is the most critical factor in determining the house you can buy. But the size of your monthly payment will be influenced by a variety of factors.
1. Mortgage principal and interest
In return for lending you the money to buy your home, your lender will charge you interest in the form of a percentage of the total principal you borrowed. The core of your monthly payment is a portion of the principal along with interest on the loan.
Average mortgage rates are historically high, but your interest rate will depend on your credit score, income and other factors. Government-backed loans like FHA, VA and USDA loans are usually offered at lower rates.
2. Private mortgage insurance
If you put less than 20% down on a conventional mortgage, you'll usually have to pay private mortgage insurance (PMI), which protects the lender if you default on the loan. PMI can be anywhere from 0.2% to 2% of the loan total and is paid until you achieve 20% equity in your home. The premiums are rolled into your monthly mortgage payments.
3. Property taxes and homeowners insurance
It's commonfor lenders to set up an escrow account for payments to be deposited into. Your homeowners insurance premiums and property taxes are then rolled into your monthly mortgage payments and paid out of that account by your lender.
Mortgage affordability FAQs
How do you calculate housing affordability?
Experts typically suggest spending no more than 30% of your income on housing expenses. So, if you earn $100,000 a year, you'd want to keep your mortgage payment to about $2,500 a month. If you have a fixed-term 30-year mortgage and pay 7% interest, that means you can afford a house that costs $300,000.
How do you get approved for a lower mortgage rate?
Mortgage rates are based on the lender, the economic environment and your individual financial profile. You can get the best rate possible by shopping around, improving your credit score, making a sizable down payment and having robust cash reserves.
Is a VA loan more affordable than a conventional loan?
Because it's backed by a government agency, a VA loan will typically have a lower interest rate than a conventional mortgage. There's no down payment requirement, either, so your monthly mortgage payments may be larger.
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