How Much House Can I Afford? Helping a first-time home buyer determine how much house they can afford to buy.

How much house can I afford?
First-time homebuyers you do need to know exactly how much house you can afford. It is the only way for you to know if you can actually qualify and afford to buy the type of house you want to buy in your local real estate market.   While it is a simple question, the answer is not.  The answer to this question varies a lot based on many different considerations and factors. 

Important Factors and Considerations
How much house you can afford depends on many different considerations and  factors such as: 

  • How much you and others who will be on the loan earn on a monthly basis
  • Your credit score, as well as, the credit score of others on the loan
  • Your minimum monthly debt payments (car loans, student loans, and credit card payments)
  • Maximum monthly house payment you are comfortable making
  • Amount of the loan you are requesting
  • Amount of the down payment you will make
  • Type of home loan you can get
  • Eligibility and utilization of special first-time homebuyer programs
  • Cost of monthly mortgage insurance premiums (if applicable)
  • Term of the loan you are getting (often a 30 year loan term)
  • Current interest rates for the type of loan you are getting
  • Property tax rates on the types of home you want to buy
  • Home Owner Association Fees (HOA) if you are buying a condo
  • Cost of monthly homeowner’s insurance premiums

Pre-Qualification vs. Pre-Approval
In order to truly know how much house you can afford you need to know how much money a lender is willing to commit to loan to you.  If the approval is in writing this is a pre-approval letter.  A pre-qualification on the other hand, is typically a verbal statement from a loan officer stating how much they think you may qualify for based on the information you provide in a short conversation without providing the necessary documentation.  This is not a pre-approval, but rather, a pre-qualification.  You should not be rely upon a pre-qualification to determine how much house you truly can afford.

Steps Before Pre-Approval
Before you seek a pre-approval from a mortgage lender, you really should first take a homebuyer training course and determine if you need the help of a homebuyer counselor in order to fully prepare yourself before you apply for a loan.  Also you will first want to carefully research which programs you feel best meet your needs and then which lenders offer those specific programs. and your local homebuyer education provider can assist you get the information you need to make informed decisions.   Once you know the type of loan you want and who offers it, then it is time to meet with a lender to request a being pre-approved.    

Preparing for Pre-Approval
Once you research and select a lender, you will then often meet with the loan officer either on the phone or in person to provide the loan officer all of the required information they will need to consider you for pre-approval.  The list on the left side of this page includes the typical documents you will need to provide your first-mortgage lender in order to request a pre-approval.  Ask your lender though what other documents they may to see and be prepared to provide them accordingly.

Pre-Approval Process
Based on the documentation you provide the lender and the information in your credit report, the lender will calculate:

  • Your gross monthly income (before any taxes are taken out)
  • Gross Monthly Income for any co-borrowers
  • Minimum Monthly Debt Obligations as a percent of total gross monthly income 
  • Maximum Monthly House Payment Calculation (included Principal, Interest, Taxes and Insurance, and HOA if buying a condo) - front-end ratio
  • Maximum monthly house payment plus other monthly debt obligaitons as a percent of your gross monthly income -back end ratio
  • Amount of cash required to close the proposed loan request

Once your lender has completed their review of your file, they will either issue you a pre-approval letter or a letter declining your loan application in which they state the reason your loan application was denied. 

Assuming you get a pre-approval letter, your lender will include the exact amount of home loan they are willing to make to you, as well as, the amount of cash you will need to close this loan. The letter will also state other conditions you must meet in order to obtain the loan, as well as, the length of time the commitment will be honored. Once you have a pre-approval letter you will then know how much house you can afford.