Can I afford to buy a home?

If you’re thinking about buying your first—or your next—home, one of the first things to determine is your price range and what you can comfortably afford.

The traditional rule of thumb is not to spend more than 30% of your gross monthly income (your income before taxes) on housing. The idea is that the remaining 70% can go to other expenses. But this rule may not be realistic for you, depending on your situation. What’s important is that you feel comfortable with what you choose to spend on homeownership. A financial professional or mortgage loan officer can help you figure out what works for you.

It's also important to take a look at your current expenses and establish a realistic budget. 

This can help you:

1. Determine what you can afford to pay monthly for a home.

2. Understand if you can afford the upfront and ongoing expenses associated with homeownership.

3. Develop a plan to save money to buy a home or for other financial goals, such as retirement or education expenses.

Use our budget worksheet to track your projected and actual monthly expenses.

Once you have a clear picture of your total monthly debt payments, you can then use our maximum loan amount worksheet to estimate the most you could spend on monthly mortgage payments, as well as the maximum amount you could potentially borrow. This estimate is based on your current income and standard qualifying guidelines.

Be sure you understand the full cost of buying and owning a home.

The total cost of homeownership includes one-time expenses such as the down payment, closing costs, and moving costs, along with a home inspection and appraisal. It also includes recurring monthly expenses like your mortgage payment, property taxes, hazard insurance, condo fees/homeowner association dues, utilities, interior/exterior repairs, and general upkeep. Lastly, if you have a home to sell, additional expenses may include repairs or renovations to increase the value of your existing home, and real estate agent commissions.

Home buying Key terms

A down payment is a set amount of money, usually a percentage of a home price, that you pay upfront. It’s equal to the difference between the sale price of the real estate and the mortgage amount. For instance, on a $250,000 home, you may choose to pay 10%, or $25,000, or 20%, which is $50,000.

Earnest money is a deposit you pay before the sale closes, sometimes when an offer is made on a home. It’s generally between 1% and 3% of the home price. It’s later applied to your down payment or closing costs.

Closing costs are fees paid at the closing of a loan. They include loan costs such as origination fees, discount points, title insurance fees, survey fees, and attorney’s fees; and other fees such as government fees, prepaids, initial escrow payment at closing, and HOA dues, if applicable.

A typical mortgage payment is made up of principal + interest + escrows. The principal portion of your mortgage payment is used to repay part of your outstanding principal balance (or loan amount), excluding interest.

The interest portion of your mortgage payment is the fee you pay to the lender for using the lender’s money. Together, the principal and interest payment are referred to as “P&I.”

The escrow portion of your mortgage payment is money collected by the lender that is deposited into an escrow account to pay annual real estate taxes, property insurance, and, if applicable, any mortgage insurance premiums or flood insurance. Together, the principal, interest, taxes, and insurance payment are referred to as “PITI.”

Know that a down payment plays a key role in monthly affordability.

Most mortgages require you to pay a percentage of your home’s selling price upfront using your own cash or funds. This amount depends on the mortgage you qualify for. Down payment requirements typically range from 0% to 20%. However, a larger down payment may be required in certain situations.

Try our mortgage calculator to see how your down payment impacts the amount of money you’ll need to borrow for your home purchase. Start with a $200,000 purchase price. You’ll notice there is a trade off—the more you can afford to put toward a down payment, the lower your total loan amount becomes. This ultimately means lower monthly mortgage payments.

Be knowledgeable about the fees you’ll pay.

In addition to the down payment, there are other fees and expenses, called closing costs, that can add up. Once you have submitted your loan application, within three business days your lender will issue a Loan Estimate, which is a list of most of the closing costs you’ll have to pay. At least three business days before closing, you will see these fees again on your Closing Disclosure, where they will no longer be estimates, but rather final figures. In the next section, you’ll find a list of typical closing costs. Closing costs are usually about 2% - 5% of the loan amount.

Other closing costs can include:

• Attorney fees
• Application fees
• Credit report fee
• Homeowners’ association transfer fee
• Prorated taxes

Home funding tip

Concerned about finding the funds for your down payment? Talk with us about third-party contributions or gift funds,^{Disclosure 1} and whether you qualify for 100% financing^{Disclosure 2} or state-sponsored down payment assistance programs

You may also want to keep some money set aside for any unexpected costs after you close on your home.

Loan key terms

A loan application is an initial statement of a borrower’s personal and financial information that is used to review a loan request.

A Loan Estimate provides borrowers with a good faith estimate of credit costs and loan terms and is given to the borrower within three business days after the lender receives a loan application.

The Closing Disclosure is a document that provides the actual terms and costs of the loan. The borrower receives it at least three business days before the closing.

Affording a home can seem intimidating, especially to first-time homebuyers. But by educating yourself about the process and the costs involved, you’ll be more confident when it comes to a home purchase—and better able to navigate the journey.