Read our guide and start saving up for the home of your dreams.
Your monthly debts are car payments, student loans, and other recurring personal expenses you make monthly payments on. This number doesn’t include credit card balances you pay off in full each month or the new mortgage you’re getting.
The first step is figuring out what you can actually afford. You want to look for the perfect backyard and kitchen, but you should also understand what your monthly mortgage payments, property taxes, and home expenses will look like.
Our calculator takes into account your income, debts (ex: car loans, student loans), and the savings you have for the down payment.
Still, even if your monthly payments are consistent, you need to consider your overall savings and how much you can set aside for emergencies. Your down payment and monthly expenses shouldn’t empty your entire bank account. Make sure you have a healthy reserve in liquid assets for life events you can’t plan.
Your debt-to-income ratio (DTI) helps lenders determine whether you’re able to afford a house. They look at your monthly debts (including your mortgage and rent, car, credit card payments, student loans, etc) and divide that number by your monthly gross income.
A healthy DTI can be up to 43%, but the best DTI for you depends on your specific financial circumstances.
Many financial advisors would suggest following the 28/36 principle. This means that your mortgage payments shouldn’t exceed 28% of your pre-tax income, and your total debt shouldn’t be more than 36% of your pre-tax income. By following the 28/36 rule, you can avoid finding yourself underwater with too much debt.
So, let’s say you make around $6,000 per month. Your monthly mortgage payment shouldn’t be over $1,680 and your monthly debt including monthly mortgage shouldn’t exceed $2,160.
Getting pre-approved and pre-qualified are two very different things. Determining which is right for you depends on your situation.
To get pre-qualified, you answer a couple questions by estimating your income, expenses, and a range of your credit score. This step gives you an initial gauge of how much the lender is willing to loan you and how much house you can afford, without affecting your credit score. It usually only takes a few minutes to complete and you don’t need to provide any documentation. Overall, a pre-qualification gives you an estimate on what you can afford.
The pre-approval process, on the other hand, tends to be more involved. You complete a mortgage application and provide at least some financial documentation for your lender to verify, and they will run a formal credit check. A pre-approval is typically stronger than a pre-qualification because the lender has verified some or all of your important financial information. That way, they have a much clearer picture of the amount they can lend you. You’re also in a better bidding position since the seller knows that your lender is willing to make a loan. Read about the differences between pre-qualifications and preapprovals for more tips!