Buying your first home is a big deal—but how big should your mortgage be? 

Investing in real estate is a major personal finance milestone. But over the last few decades, millions of Americans have found themselves in mortgages too big to handle. Financial stress, foreclosure, even bankruptcy can be the unfortunate result of getting a mortgage out of your price range.

In this article, we will discuss how to approximate the amount you’ll qualify for and how to decide how large a mortgage you can handle. Let’s do this thing.

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Understanding Home Affordability

Home buying is no small feat. It takes diligence in record keeping, sound financial habits, and a clear understanding of how home buying works. When it comes to getting approved for a mortgage, there are several factors at play:

  • Income
  • Debt
  • Savings
  • Monthly expenses
  • Credit history and credit score

Everyone has a unique financial picture. Understanding yours is key to getting an affordable home. 

Income

Your income is significant because it proves to your lender that you can pay back your loan. Your income acts as added collateral to back your loan. When deciding on your preapproval, mortgage lenders look at your gross income, also known as your income before tax.

When you apply for a home loan, your mortgage lender will want proof of your income. You can show proof of your income through pay stubs or a letter from your employer confirming your salary. If you have irregular income, you will need to show tax returns and recent pay stubs. Your lender will determine your average income based on the evidence you provide.

Keep in mind that some lenders will not count side gig income. Be sure to do your research before applying for preapproval. You don’t want to create a hard pull on your credit only to discover that you cannot qualify with this lender. 

If you work for yourself, you will need two years of tax returns to prove your annual income. Your lender will likely use an average of the last two years to decide your income. 

Debt and Debt-to-Income Ratio

Your current debt will be taken into account when your lender decides your approval amount. While most lenders what to see housing costs below 28 percent of your gross monthly income, they’ll also be interested in your total debt payments. Monthly debt payments include:

  • Credit card payments
  • Car payments
  • Student loan payments

As a rule of thumb, most lenders want to see a debt-to-income ratio below 41%. We recommend keeping your DTI as low as possible. Some lenders have more strict rules and may treat different types of debt with more restrictions. High-interest debt like on a credit card is less appealing than a low-interest student loan. The same goes for car loans, which typically have higher interest rates than other lending. 

Savings

The amount of money you’ve saved to put toward the down payment and closing costs of the home is a very important factor. The more you’ve saved, the larger the mortgage. Bear in mind that your savings is there for more than initial equity. You’ll need to tap into it to cover your realtor fees, inspection, and any repairs or maintenance required right away. 

Monthly Expenses

If you have other obligatory monthly expenses, like alimony or child support, your lender will take this into consideration. The higher your other monthly payments, the lower your mortgage approval will be. 

In addition to what your lender cares about, you should also take into account your monthly expenses. What does your monthly budget look like? How do you plan to afford the new costs of homeownership? Answer these questions, and you’ll be able to protect yourself from making too large a debt-based investment. 

Credit History and Credit Score

While your credit may not affect the amount you’re allowed to borrow by much, it still has a considerable impact. To your lender, your credit score indicates your likelihood of defaulting on your mortgage: the lower your score, the higher your risk of default. 

When you have a high likelihood of default, your lender hedges its bet on you by raising the interest rate on your mortgage. Raising the interest rate means your lender has a higher likelihood of regaining the amount it lent to you to buy the house. 

If you want a better mortgage rate, take care of your credit. The difference between good credit and very good credit can save you thousands over the life of your mortgage. 

How much House Can I Afford on $60,000 a year?

On $60,000 a year, with no other debt, you should be able to afford a mortgage anywhere from $230,000 to $300,000—depending on your downpayment amount.  Your monthly payment will be anywhere from $1200 to $1800. But the expenses don’t end with the mortgage. You also need to cover:

  • Property taxes
  • Homeowners insurance
  • Maintenance costs
  • All utilities
  • Emergency repairs
  • Private mortgage insurance (PMI) premiums, if applicable
  • Homeowners Association (HOA) fees, if applicable

However: Just because you can technically afford it doesn’t mean a big mortgage is right for you. Your mortgage is just one part of your economic security. You need to save for other financial goals, like your child’s education. When it comes to leveraging debt, leaving some breathing room is paramount. 

You should also consider ways that your home investment can produce income. If you’re young, consider renting out other rooms. Another option is to look for a multi-unit home within your price range

Frequently Asked Questions About Mortgage Affordability

What if I can’t afford a 20 percent down payment?

If you can’t afford the full 20 percent for a down payment, you can still qualify for a mortgage. With great credit, you can qualify for a mortgage with as little as three percent. If your credit needs some work, look into an FHA loan.  FHA loans are backed by the government entities Freddie Mac and Fannie Mae. However, the loans are underwritten and serviced by traditional lenders.  Either of these options will come with the added expense of private mortgage insurance (PMI), so be sure to factor that into your monthly mortgage payment. 

When is it okay to choose a bigger mortgage?

There is just one scenario endorsed by Insurify: a bigger mortgage is okay when the property produces income. This is because the income produced will offset the amount coming directly from your pocket, making your mortgage less of a financial burden.  But don’t get too comfortable! You’ll be spending more in homeowners insurance as a landlord. Plus, if your tenant can’t pay or a unit remains vacant, you’ll need to come up with the whole mortgage payment on your own. 

Conclusion: All Debt In Moderation

Whether you get approval for a large, medium, or small mortgage, one thing is clear: don’t overload your budget with housing expenses. Homeownership is about investing in yourself as much as it’s about finding the home of your dreams. Don’t forget that your first home is often a stepping stone to your next home. Choose wisely, and you won’t go wrong.

And when you’re ready to move in, don’t forget to shop homeowners insurance through Insurify. One form lets you compare rates, adjust coverage options, and make your purchase without giving your information to everyone. Try it today!

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Updated June 24, 2020

J.J. Starr is a health and finance copywriter who enjoys helping readers find the information they need. In addition to her background in banking and financial advising, she is also a poet with an MFA from New York University. She lives in Amherst, Massachusetts. You can learn more at jjstarrwrites.com.