How Much House Can I Afford?

When you’re ready to take the plunge into homeownership – or when it’s time to move out of your current home into one that better meets your needs – setting a budget is a crucial first step. Determining what you can afford includes evaluating your income and debts, thinking through the up-front costs associated with buying and moving, and calculating long-term costs like interest on your home loan. Follow these steps to figure out your purchasing power:

Examine Up-front Costs

Down payment

Depending on your home loan, you may be required to put 3%, 5%, or as much as 20% down. (With a City National Bank Champion Mortgage, no down payment is required. Call your local branch to learn more about your mortgage options.)

Closing costs

Expect to pay an additional 2 – 5% of the total loan amount in closing fees.

Cash reserves

Most lenders want to ensure you have a few months of emergency savings left after paying these up-front costs.

Moving and furnishing a new home

If you plan to hire a moving company, rent a moving truck or buy new furniture for your next place, these costs should also come into play when considering your up-front expenses.

Apply the 28/36 Rule

Mortgage lenders sometimes use this classic benchmark to make sure you don’t stretch your finances too thin.

The 28% Rule

Your monthly housing costs should not exceed 28% of your gross (pre-tax) monthly income. This includes principal, interest, property taxes, homeowners insurance and HOA fees.

The 36% Rule

Your total debt payments should not exceed 36% of your gross monthly income. This includes the housing costs above plus auto loans, student loans, minimum credit card payments and other debt payments.

Use a Mortgage Calculator

To crunch some numbers and get estimates based on today’s housing market and interest rates, use an online calculator tool. Please be sure to consider what monthly payment amount you are comfortable with based on the details above – it may be less than the amount an online tool indicates you can afford.

City offers several financial calculators that you might find helpful.

Going through these exercises on your own before you reach out to a realtor or lender will help set appropriate expectations and allow you to move forward with a budget that is realistic. Then, when you’re ready, you can get pre-qualified by a lender and set your purchase limit.

Questions?

To learn more about City mortgage options or to connect with a lender near you, choose one of the options below.