You should only spend up to 28% of your monthly gross income on housing costs, according to the 28/36 rule recommended by many financial experts. Housing costs include your mortgage payment, taxes, and insurance.
However, how much house you can realistically afford will depend on multiple personal and financial factors.
A good real estate agent can help you figure out exactly how much home you can afford. When you use our friends at Clever Real Estate, you’ll get matched with a top agent in your area. Plus, eligible buyers get 0.5% Clever Cash Back, which could save you thousands.
- Housing costs shouldn’t account for more than 28% of your monthly gross income, according to the 28/36 rule.
- Your total monthly debts shouldn’t be more than 36% of your monthly gross income.
- The Federal Housing Administration uses a 43% debt-to-income ratio when it approves mortgages.
- You’ll get the best sense of where you stand in the market by working with a good agent.
How much should I spend on a house?
If you follow the 28/36 standard, you should plan to spend roughly the following amount on housing costs each month.
Then, based on an average interest rate of 4% on a 30 year mortgage loan with a down payment of 20%, this is how much house you could potentially afford. Note: factors like your credit score and other debt could substantially impact how much of a mortgage loan you could qualify for.
|Your monthly gross income||Amount you should spend on a house each month*||Estimated home purchase price**|
Your total debt-to-income ratio
The second part of the 28/36 rule says your total debt payments each month — your housing, plus things like student loans, car loans, and credit card debt — shouldn’t exceed 36% of your gross monthly income.
The Federal Housing Administration (FHA) uses a larger 43% debt-to-income (DTI) ratio as a standard for approving its mortgages. With this ratio, your debt payments each month shouldn’t exceed 43% of your gross monthly income.
While these DTI guidelines are widely accepted, they’re not universal. Lenders generally follow the FHA’s lead, but they can have different financial criteria for approving loans, depending on local market and economic conditions.
To follow either of these two DTI guidelines, you should spend roughly the following amount on your total debt including housing each month:
|Your monthly gross income||The most you should spend, according to 28/36 rule*||The most you should spend, according to DTI ratio**|
Your monthly payment isn’t the only money you’ll spend on a house — hello down payment! You’ll need to take into account that upfront money, plus other factors like your credit score and the associated costs of owning a home that you might not know about.
Let’s go deeper into how much it actually costs to buy a house and how your lender is going to evaluate you.
What should I spend on a down payment?
The standard down payment is 20% of a home’s price. Here’s how much that down payment could cost you:
|Price of home||20% down payment|
Buying a home using a smaller down payment
You can still buy a home without 20% down. With an FHA loan, for example, you could buy with only 3.5% down.
That said, making the standard 20% down payment comes with a lot of benefits. First and foremost, it makes your mortgage payments much smaller. If you buy a $400,000 home with 3.5% down payment (a $14,000 down payment and a $386,000 loan) and a 30-year, 4% fixed-rate mortgage, your monthly mortgage payment would be around $1,842.
If you put 20% down on the same house, bringing your loan amount to $360,000, that monthly mortgage payment costs approximately $1,718 — nearly $215 less a month.
The potential added cost of private mortgage insurance
If you don’t put 20% down, you’ll likely have to pay private mortgage insurance (PMI). PMI is an additional monthly charge (plus an upfront payment) that offsets the increased risk your lender takes on by loaning you money with little or nothing down.
You’ll need to pay PMI every month, on top of your mortgage payment, until you build up 20% equity. How much does PMI cost? That depends on several factors, including the amount borrowed and your credit score, but Freddie Mac estimates most borrowers pay $30–70 per month per $100,000 borrowed.
Here’s how much you could pay in PMI per month on different size loans, based on Freddie Mac’s estimates:
|Amount of money borrowed||Amount you'll pay in PMI each month*|
How your credit score affects your mortgage
The higher your credit score, the better your mortgage options.
Most homeowners have pretty decent credit; according to data from Ellie Mae, home buyers using conventional loans in the first half of 2020 averaged a 756 credit score. For reference, any score over 740 is considered very good, while scores 800+ are excellent.
Let’s look at the minimum credit scores for common loans so you can see what options you have, and then we’ll touch on interest rates.
FHA loan: 500s
If your credit score is in the 500s, your best bet for a mortgage is one backed by the Federal Housing Administration (FHA). These loans come with very generous down payment requirements as low as 3.5%, though you’ll need to have a credit score of at least 580 to qualify for this low rate. If you score below 580, you’ll have to put down 10%, or half as much as you would for a conventional loan.
Individual lenders can still have their own minimum credit scores for FHA loans, so nothing is guaranteed. On top of that, if you put less than 20% down, you’ll likely be required to pay private mortgage insurance (PMI) on top of your monthly mortgage payment.
Conventional loan: 620 and up
The minimum credit score for a conventional loan is 620. As with FHA loans, individual lenders may have higher requirements.
Keep in mind you’ll also receive better rates on PMI if you have a high credit score. A borrower with a credit score of 760 will pay less than a third as much for PMI as a borrower with a 620 score would.
Jumbo loan: 700 and up
If you’re looking to get a loan that’s larger than the conforming loan limit ($548,250 in 2021), you’ll need a very good credit score of 700 or even 720. Lenders consider a loan of this size a pretty high risk, so they’ll want to know you’re responsible and have solid finances.
A note about interest rates
To get the best interest rate on your mortgage, you’ll generally need a credit score above 700. Lenders usually adjust interest rates based on 20-point increments, so your interest rate will get slightly worse for every 20-point decrease below 700.
Even a small change in interest rate adds up to a lot of money over a 30-year mortgage. A borrower with an excellent 780 credit score could get an interest rate of 4% on a $480,000 loan, which would come to a monthly payment of $2,328.
Now let’s say that same borrower had a credit score 100 points lower, at 680 — still a fairly good score. If they got an interest rate of 4.5% for the same $480,000 loan, their monthly payment would increase to $2,432.
That’s an increase of $104 a month, or $1,248 a year.
Over the life of a 30-year loan, that’s an additional $37,400 — from only a 0.5% increase in interest rate.
The bottom line is you should clean up your credit as much as you can before you apply for a mortgage. It pays off in the short and long term.
One other way to save when buying a home? Our partner Clever connects buyers with top-rated agents across the U.S. Eligible buyers can get 0.5% cash back when they buy!
The other costs of homeownership
Your down payment and mortgage don’t make up the entirety of your homeownership costs. On top of that, you must pay for homeowners insurance, property taxes, and maintenance costs.
While homeowners in the U.S. pay an average of $2,305 a year to insure their homes, according to Insurance.com, the costs vary wildly among states. For example, Oklahoma has the highest average cost, at $4,445 (nearly twice the national average), while Hawaii has the lowest cost, at only $499 a year.
Property taxes also vary based on where you live and the worth of your property. According to data from ATTOM Data Solutions, homeowners paid an average property tax bill of $3,561 in 2019, for an effective tax rate of 1.14%. Illinois had the highest effective tax rate, at 2.2%, and Hawaii had the lowest, coming in at 0.36%.
You will have to spend money every year on maintaining your home; it’s just a question of how much.
According to HomeAdvisor, U.S. homeowners spend an average of just over $1,100 a year on home maintenance. On top of that, about a third of homeowners each year have to pay for an emergency repair of some kind, averaging slightly more than $1,200.
Most experts recommend the 1% rule, where you plan to spend 1% of your home value on maintenance each year. Therefore, the owner of a $200,000 home should plan on spending $2,000, the owner of a $300,000 home should plan on spending $3,000, and so on.
How much should I spend on a house if I don’t already have debt?
If you’re one of the lucky people in the U.S. who isn’t carrying a lot of debt — good for you! But when lenders assess your loan application, they won’t hold you to the same 43% DTI standard as someone with more debt.
Lenders use something called a “front-end debt-to-income” ratio, a fancy term for the percentage of your monthly income you’ll spend on housing expenses. They don’t consider it healthy for you to spend 43% of your income entirely on housing, as it could restrict your ability to handle financial adversity that pops up, so they use a lower 28% number for those with little debt.
As an example, let’s say your monthly gross income is $3,500, and you don’t have any substantial debts. You won’t be able to spend the full $1,505 (43% of your monthly gross income) on your mortgage and associated expenses. Your lender will likely set your max housing expenses at $980 (28% of your monthly gross income). That’s a significant reduction.
While this may seem overly cautious to some, keep in mind that a mortgage is a multi-decade commitment. It’s almost certain that you’ll be dealing with some financial surprises over the course of a 30-year mortgage, so the lower DTI ratio protects both you and the lender.
How an experienced real estate agent can help
The rules and principles outlined above will help you get a good idea of how much house you can afford, but the best way to get a sense of where you stand in the market — and to not overextend your finances — is to work with a good agent.
An experienced real estate buyer’s agent can help you understand your limits, what you can afford, and how much things really cost beyond just the sticker price. Even better, an agent can often find a property that’s out of your budget and negotiate it down to an affordable price point.
Our partner Clever Real Estate connects buyers like you to experienced local agents who can help you locate, negotiate, and close on your dream home. On top of that, Clever offers eligible buyers Clever Cash Back, where you get a check after closing worth 0.5% of the purchase price of your new home Intrigued? Contact Clever today to start your real estate journey!
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Do I make enough money to buy a house?
Lenders don't require buyers to make a specific amount of money to buy a house. However, lenders do take into account your income and your debts to determine who they'll lend money to. A good real estate agent can help you determine what kind of house you can afford with your income.
What is the 28/36 rule?
The 28/36 rule is a standard recommended by many financial experts that states you should only spend up to 28% of your monthly gross income on housing costs, and your total monthly debts shouldn't exceed 36% of your monthly gross income. Find out how to save money when you're buying a house.