How much house can I afford?

The purchase price is just one factor in figuring out if a house is affordable. Other important factors include: 

• Down payment. A larger down payment can lower your loan amount and monthly payments. 
• Credit score. Higher credit scores typically qualify for lower interest rates. 
• Loan-to-value ratio. This affects whether you’ll need private mortgage insurance (PMI) and can influence your loan terms. 
• Debt-to-income ratio (DTI). Lenders use DTI to measure whether your income can comfortably cover your monthly debts, including a mortgage.

Some borrowers assume they need to make a down payment – the portion of the purchase price the homebuyer pays up front – of 20%.  However, many loan options allow you to put down less. In fact, Wells Fargo has a 3% down payment option on a fixed-rate loan and low or no down payment for qualified borrowers. No down payment option may be available on VA loans for qualified borrowers.

Talk with a home mortgage consultant about loan amount, loan type, property type, income, first-time homebuyer, and homebuyer education requirements to discuss eligibility.

One way to estimate if a $400,000 house is affordable is to use the 28/36 rule. This guideline states that no more than 28% of gross monthly income should go to housing costs, and no more than 36% should go toward debt payments.

For example, if your monthly mortgage payment is around $2,500, you would need a gross monthly income of about $8,900 (or roughly $107,000 per year) to stay within the 28% guideline. Your actual required income will vary based on your down payment, interest rate, property taxes, insurance costs, and other debts.

A good way to figure out what you can afford is to start with your monthly budget. Ask yourself what monthly payment you'd feel comfortable with, even if unexpected expenses arise. A tool like our home affordability calculator can provide a helpful estimate of how much mortgage you can afford based on details like your income, debts, location and down payment.

Depending on where you are in the homebuying process, the next step is typically getting preapproved or prequalified for a mortgage. Many homebuyers choose to get prequalified early to get an idea of their borrowing potential. But if you're at the point where you're touring homes, a preapproval, which usually involves a credit check, may be the next step.

You might also want to run different scenarios using a home loan mortgage calculator. Most online calculators give you an estimate of your monthly payment based on the purchase price, interest rate, loan term, and down payment. Some tools also allow you to include property taxes, homeowners insurance, and association fees to give you a more complete picture of your potential monthly costs.

Monthly housing costs are more likely to remain manageable if they fit comfortably within your budget and leave room for savings. Look for a payment that allows you to cover regular expenses, handle unexpected costs and continue building your financial cushion. Keep in mind that property taxes and homeowners insurance premiums may increase over time.

In addition to your mortgage payment, consider other ongoing costs of homeownership, such as maintenance and utilities. Researching typical expenses in your area and planning for routine upkeep can help you determine whether a home’s total monthly cost is likely to stay manageable in the long run.

When you get a mortgage, your monthly payment amount and the total amount you repay for the loan are determined by several factors, including the interest rate, loan term, and the amount you borrow. Here are some basic home financing terms to help you understand how it works.

Interest rate

• The interest rate is the percentage of your loan amount we charge you to borrow money.
• Interest rates are based on current market conditions, your credit score, down payment, and the type of mortgage you choose.
• Remember that interest rates only tell part of the story. The cost of a mortgage is reflected by the interest rate, discount points, fees, and origination charges. This cost is known as the annual percentage rate (APR), which is typically higher than the interest rate. The APR lets you compare mortgages of the same dollar amount by considering their annual cost.
• Check today’s rates to see rate and APR information for popular loan types.

Discount points

• One point equals 1% of your mortgage amount; however, one point will typically reduce the interest rate by less than 1%. If you qualify, you may be able to pay one or more points to lower your interest rate. A lower interest rate means lower monthly mortgage payments.
• Points are usually tax deductible. Consult a tax advisor regarding tax deductibility. On refinances you may be able to finance points as part of your mortgage amount.

Origination charge

• On a mortgage, this is the amount paid to the lender for originating the loan.
• The origination charge covers document preparation, mortgage underwriting costs, and other fees and expenses.
• The origination charge is separate from discount points and other closing costs.
• On refinances, if you qualify, you may be able to finance the origination charge as part of your loan amount.

Loan term

• Your loan term is the amount of time you have to pay off your mortgage balance.
• Shorter loan terms typically mean higher monthly mortgage payments, but they often have lower interest rates.
• If you pay off your mortgage balance within a shorter term, you may pay less in total interest than with a longer-term mortgage.

Monthly mortgage payment

Your monthly mortgage payment is typically made up of four parts:

• Principal. The part of your monthly payment that reduces the outstanding balance of your mortgage.
• Interest. The part of your monthly payment that goes toward the cost of borrowing the money.
• Taxes. The part of your monthly payment that goes toward property taxes charged by your local government. We typically collect a portion of these taxes in every mortgage payment and hold the funds in an escrow account for tax payments made on your behalf as they become due.
• Insurance. The part of your monthly payment that pays for homeowners or hazard insurance, which provides protection against losses from property damage due to wind, fire, or other risks. Like taxes, insurance costs are usually collected and paid from an escrow account.

Depending upon your property location, property type, and loan amount, you may have other monthly or annual expenses such as mortgage insurance, flood insurance, or homeowner association fees.

Choosing when to buy a home is a very personal decision that will depend on many factors. The following questions can help determine if you’re ready to become a homeowner:

The following questions can help you determine if you’re ready to make the leap:

• Do you have a stable source of income?
• Are you budgeting for your monthly bills?
• Do you know how much you can afford for monthly mortgage payment?
• Once purchased, how long do you plan to stay in your home?