How to determine how much you can spend on a new home

Before you begin the home buying process, it’s important determine exactly how much money you can afford to spend on your new home. Knowing this information upfront can save you a lot of time and effort and is one of the keys to long-term successful homeownership. Here’s how:

To determine how much you can realistically afford, you’ll want to determine how much you will have for a down payment. In general, you will need to have at least 10 percent of the home’s price for a down payment. If you want the best loan terms, you should plan to have at least 20 percent for a down payment.

When making lending decisions, banks also consider the cost of housing in comparison to your income. Your monthly housing expenses including your mortgage, taxes, and insurance should be no more than 28 percent of your monthly income. Of course, your other debts also play a factor. In general, lenders want your total debt-to-income ratio – which includes things like credit card debt, child support payments, and student loans – to be no more than 36 percent.

So, in addition to a good credit history, these are some of the things that lenders are looking for. But it is very important to remember that qualifying for a loan and being able to afford that loan are two different things. Before you make such a large commitment, you’ll want to consider a number of other factors too. For example, what are your other monthly expenses? And how secure is your income? In other words, what is your comfort level?

Keep in mind that there are some hidden costs of homeownership that you’ll need to factor in to your budget when you become a homeowner such as maintenance costs, association dues, and utilities.

Money Management International (MMI), a HUD-certified housing counseling agency, is celebrating National Homeownership Month throughout June by providing potential and existing homeowners with valuable tips and tools. Visit the updated Homeownership and Home Loans section of MoneyManagement.org to learn more. 

Kim McGrigg is the former Manager of Community and Media Relations for MMI.

  • The Consumer Federation of America (CFA) is an association of nonprofit consumer organizations that was established in 1968 to advance the consumer interest through research, advocacy, and education. Today, nearly 300 of these groups participate in the federation and govern it through their representatives on the organization's Board of Directors.
  • The National Council of Higher Education Resources (NCHER) is the nation’s oldest and largest higher education finance trade association. NCHER’s membership includes state, nonprofit, and for-profit higher education service organizations, including lenders, servicers, guaranty agencies, collection agencies, financial literacy providers, and schools, interested and involved in increasing college access and success. It assists its members in shaping policies governing federal and private student loan and state grant programs on behalf of students, parents, borrowers, and families.

  • Since 2007, the Homeownership Preservation Foundation (HPF) has served as a trusted, neutral source of information for more than eight million homeowners. They are partnered with, and endorsed by, numerous major government agencies, including the U.S. Department of Housing and Urban Development and the Department of the Treasury.

  • The mission of the U.S. Department of Housing and Urban Development (HUD) is to create strong, sustainable, inclusive communities and quality affordable homes for all. HUD works to strengthen the housing market in order to bolster the economy and protect consumers; meet the need for quality affordable rental homes; utilize housing as a platform for improving quality of life; and build inclusive and sustainable communities free from discrimination.

  • The Council on Accreditation (COA) is an international, independent, nonprofit, human service accrediting organization. Their mission is to partner with human service organizations worldwide to improve service delivery outcomes by developing, applying, and promoting accreditation standards.

  • The National Foundation for Credit Counseling® (NFCC®), founded in 1951, is the nation’s largest and longest-serving nonprofit financial counseling organization. The NFCC’s mission is to promote the national agenda for financially responsible behavior, and build capacity for its members to deliver the highest-quality financial education and counseling services.