How Much House Can You Afford? (The 28/36 Rule)

Buying a house can be a daunting task. You have to think about how much you can afford, the mortgage rate, and whether or not you’re comfortable with taking on a mortgage for 30 years. But what about the down payment? How much do you need to save up for that? And once you’ve saved up enough, is there a limit to how much house you can afford?

Buying a house can be a daunting task you have to think about how much you can afford the mortgage rate and whether or not you’re comfortable with taking on a mortgage for 30 years but what about the down payment how much do you need to save up for that and once you’ve saved up enough is there a limit to how much house that you can afford enter the 2836 rule

This nifty little guideline will help you figure out exactly how much that you can afford based on your monthly income and expenses keep watching to learn more what’s going on everyone i’m kyle handy my partner mark ramaker and i are your house heroes together we’ve been selling real estate for over 20 years we’re here because we want to empower home buyers and

Home sellers through education sharing insider tips and discussing market trends so if you’re just confused or you want to know everything you need to know about getting the best deal or selling your home for the most money you’re in the right place now before we get started if you could do us a huge favor and go ahead and hit that like button we would greatly

Appreciate it also consider subscribing if you haven’t already as we release a new video three times per week you won’t want to miss any of them finally if you’d like our free real estate home buying or home selling guide head on over to backslash and download them today okay now let’s get started how much house can i afford purchasing a home

Is likely one of the largest decisions you will ever make the mortgage rate down payment and mortgage loan term all need careful consideration but once you’ve saved up enough for a down payment and chosen the right mortgage that’s right for you how much house can you afford enter the 28 36 rule so what is the 2836 rule the 2836 rule also called your front-end and

Back-end ratio is a mortgage affordability guideline created by mortgage lenders as a means to determine how much house that you can afford before applying for a mortgage loan it’s designed to ensure that mortgage applicants can maintain monthly mortgage payments and monthly debt payments without overextending themselves financially the rule says your total housing

Expenses mortgage principal and interest property taxes insurance and mortgage insurance if applicable should not exceed 28 of your gross monthly income before taxes your total debt payments including mortgage payments should not exceed 36 of your gross monthly income before taxes so how do you calculate your home’s affordability so for example if you earn sixty

Thousand dollars annually five thousand dollars per month before taxes your total monthly mortgage payment should not exceed fourteen hundred dollars per month according to the 28 side of the rule simply multiply 5000 by 28 also in the example above your total debt payments should not exceed 1800 per month according to the 36 side of the rule this would include the

1400 mortgage plus any car payments student loans minimum required payments on credit cards and any other monthly debt payments here eighteen hundred dollars is five thousand multiplied by thirty six percent another method for calculating the 2836 rule is to divide your desired monthly payment by 28 to figure out the gross monthly income that you’d need to afford

A home with that payment so for example if you felt 2 000 was your desired monthly payment you could divide this number by twenty eight percent and find that you would need a monthly gross income of seven thousand one hundred and forty two dollars before taxes next take the required income of seven thousand one hundred and forty two dollars and multiply that by

Thirty six percent to calculate how much other debt that you could have in addition to your mortgage payment and still qualify for the mortgage loan this calculation comes out to two thousand five hundred and seventy one dollars which is seven thousand one hundred and forty two dollars times 36 percent that means if you subtracted the 2 000 mortgage payment you

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Could have an additional 571 dollars in monthly debt once you know how much payment you can afford you can roughly calculate the overall home price that you should be looking at the fastest and easiest way of doing this is by using a home affordability calculator which i’ll link to one in the description below however keep in mind that this is based on having a

Good credit score property taxes being around one percent in your state and putting down 20 so assuming a 20 down payment three and a half percent interest rate 30-year loan term one percent for taxes and one-half percent for insurance a 300 000 home would equate to a fourteen hundred dollar mortgage payment but if you’re still wondering how much house can i afford

Based on different factors or want to know exactly what goes into this affordability calculator keep watching there are four main factors that affect how much home you can afford to purchase by changing any of these factors you increase or decrease the monthly mortgage payment which ultimately affects the home price you’ll be able to purchase number one the credit

Score out of the following four factors affecting the affordability of your home your credit score is actually the least impactful although it does still matter typically a credit score of 500 or above is required to even obtain a mortgage loan 620 for conventional loans so as long as you meet the minimum credit score required the interest rate that you receive

From the mortgage lender doesn’t change drastically in fact many times you can receive the same interest rate with a 680 credit score as someone with a 740 credit score but just may have to pay a bit more upfront and closing costs speaking of closing costs check out our video on everything you need to know about closing costs including what they are and how much

They cost i’ll add the link above but overall the difference between a 500 credit score and an 850 credit score will change the overall interest rate by around a half to one percent and while you may be thinking one percent on your interest rate is a lot and you’d be correct typically when you have a lower credit score you’d be looking at other loan options like an

Fha loan or a va which don’t penalize you for a lower credit score therefore while a lower credit score does impact your ability to purchase a more expensive home there are more options to minimize the effect number two interest rate we just talked about the interest rate explaining the impact of your credit score however more importantly are how external factors

Affect interest rates interest rates are constantly changing you have governmental factors inflation and overall financial markets impact interest rates and can swing the rate you receive much more than your credit score in fact just in one year between february 2021 and february 2022 the interest rates have risen an entire point from 2.75 to 3.75 to put this in

Perspective at a three percent interest rate a fifteen hundred dollar monthly mortgage payment equates to a home purchase of three hundred and ten thousand five hundred dollars however at a four percent interest rate to stay at that fifteen hundred dollar a month payment you would need to decrease your purchase price to two hundred eighty four thousand two hundred

Fifty dollars this effectively shaves off twenty five thousand dollars of purchasing power when the interest rates rise by one percent next the debt to income ratio another major factor that impacts the overall purchase price you’ll qualify for is your debt to income ratio your debt to income ratio or dti is the percentage of your income that goes towards debt

Payment simply put the more debt you have prior to obtaining a mortgage will directly impact how much home that you’ll be able to afford remember the 2836 rule above the 36 side of the rule takes into account all your debt including car loans student loans minimum payments on credit cards and any other required monthly payments that you owe therefore even if you

Could qualify for a home based on the 28 side of the rule if you have a lot of additional monthly debt payments you’ll likely not qualify or qualify for less home than if you had no or minimal monthly debt for example if you earned ten thousand dollars per month the 28 side of the rule says that your monthly payment could be twenty eight hundred dollars per month

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Roughly a six hundred thousand dollar home with 20 down however if you had a thousand dollars in monthly debt outside of your mortgage loan that you’d be applying for the 36 side of the rule would say that your total debts would not be able to exceed thirty six hundred dollars per month this means you’d subtract the one thousand dollars from thirty six hundred which

Equals a monthly payment of twenty six hundred dollars which is roughly a five hundred and sixty thousand dollar home with twenty percent down as you can see the debt you carry can greatly impact the overall home’s purchase price that you can afford and next is the down payment the final factor that will affect how much house you can afford is your down payment

Down payments can vary from 0 down with a va or usda loan to as much as you want to put down the most standard down payments are zero percent down for va in usda three and a half percent down for fha loans and between three and twenty percent down for conventional loans typically the more money you put down on a home the more home you can purchase for example if

You could only afford to put five percent down on a home instead of twenty percent your mortgage payment will be higher because you’re borrowing more money over time due to this added interest you’ll likely have to purchase a less expensive home in order for it to not impact your monthly mortgage expense which is part of the 2836 rule with 20 down a 300 000 home

Would equate roughly to a 1500 mortgage payment assuming four percent interest rate one percent property taxes and a hundred dollars a month for insurance however with a five percent down payment to stay at a fifteen hundred dollar mortgage payment you’d need to purchase a home with a price of roughly 235 000 also i want to talk real quick about private mortgage

Insurance in addition to lowering your overall loan amount when you put 20 down you remove private mortgage insurance which also helps increase how much home that you can afford in fact as you increase your down payment the amount of mortgage insurance required decreases therefore even if you can’t put down the full 20 percent putting down 10 or 15 percent can

Reduce private mortgage insurance substantially if you want to know how much money you need to save before buying a house check out the video that we made here that will link above house affordability options now that you understand how certain factors affect how much house you can actually afford let’s talk about the things you can do to increase your purchase

Power reduce your debt to income or dti the biggest impact you can make to afford a more expensive home is to lower your monthly debt obligations if you have a high monthly car payment or student loans or credit card balances paying these down prior to obtaining a mortgage loan can positively affect the price of your home you can afford for example if you have a

Thousand dollars in monthly debt payments and earn five thousand dollars per month you can increase your homes purchase price from 155 000 to 260 thousand dollars by simply reducing your monthly debt obligations by 500 this might mean selling a car or paying off the auto loan or paying down your student loans or credit card balance but as you can see this impacts

Your ability to afford a more expensive house increasing your down payment sometimes saving for a greater down payment may be the best option to afford the home you desire by increasing your down payment you will lower the amount of your mortgage what you borrow which in turn lowers your monthly payment this lower monthly payment may be what you need to qualify

For the home you want based on your debt to income ratio for example if the highest payment you qualify for is fifteen hundred dollars a month increasing your down payment from five percent to ten percent means going from two hundred forty thousand dollar home to 255 thousand dollar home increasing your down payment to 20 means you actually can qualify for a 300 000

Home increased credit score as mark mentioned earlier credit score does impact how much house that you can afford but its effect can be minimized by either improving your score or finding a loan program that doesn’t penalize a lower credit score as much as a conventional loan does but for comparison’s sake let’s stick with a conventional loan all things considered


Let’s say the difference between the minimum conventional score of 620 and a 740 score results in three quarters of one percent difference in rate this means that a home with a price of two hundred and thirty five thousand dollars which is fifteen hundred dollars at three point seven five percent with five percent down would have the same monthly payment as a home

With two hundred and twenty thousand dollars which is fifteen hundred dollars at four and a half percent with five percent down as you can see improving your credit score may improve your ability to afford a more expensive home however the impact is not as great as some of the other factors discussed earlier have you ever wondered what your credit score starts at

Check out our video where we talk all about credit scores and what you need to know we’ll link it above so now let’s talk about considering different loan types choosing a loan type can also affect how much house that you can afford you’ll want to choose a loan program that matches your particular needs there are loan programs that are more suited to buyers that

Have a lower down payment higher debt to income ratio lower credit score or even the way in which you earn income w-2 versus self-employed here are some of the different loan programs that you may want to consider outside of your typical conventional loan an fha loan an fha loan is an option for first-time home buyers and buyers with lower credit scores buyers can

Qualify for an fha loan with as little as 500 credit score with 10 down and 580 with three and a half percent down also 100 of your down payment on an fha loan can be a gift finally there are many down payment assistant programs that can be used with an fha loan usda loan a usda loan is another loan type designed for rural areas where conventional mortgages are

Difficult to obtain the main benefit of a usda loan is that you can put zero percent down however the property must be located in a specified usda qualified rural area a va loan a va loan is another loan type designed for military veterans or active service members that qualify there are no down payment requirements on va loans though there is a funding fee of

Two percent that is tacked onto the loan amount finally if you’re buying in certain areas you may be able to use state benefits like first-time homebuyer credit if you’re curious about whether an fha or conventional loan is right for you check out our video where we compare the two in detail we’ll link it above wondering how much house you can afford you’ve come

To the right place we know that buying a home is one of the biggest investments most people will ever make and we want you to feel confident in your decision with all the information necessary if you like this video make sure you subscribe to our youtube channel right now just click the subscribe button below this video also hit that thumbs up button to give this

Video a like as it helps our videos reach more buyers and more sellers looking to understand the real estate process oh by the way we have teams and agents all over the place so if you’re in need of a house here for your next home purchase or sale head on over to backslash consult to get a free buyer or seller consultation this consultation will

Take place via zoom and we’ll answer any questions that you may have and go over our process finally if you made it this far we want to thank you type hashtag hero in the comments to let us know you watched all the way to the end and now we want to turn it over to you what questions do you have about figuring out how much house you can afford let us know in the

Comments below until our next video enjoy the day and drink water you

Transcribed from video
How Much House Can You Afford? (The 28/36 Rule) By Your House Heroes