How to Calculate Your Home Budget and Determine If You Can Afford It

Buying a home is one of the most significant financial commitments most people make. Before you start touring homes or meeting with realtors, it’s crucial to calculate your budget and determine whether a home is truly within your means. A realistic home budget helps you plan responsibly and avoid financial strain in the future. At My Easy Mortgage, we believe in empowering homebuyers with the knowledge to make informed decisions. In this article, we’ll explore the steps to calculate your home budget and assess your affordability, so you can purchase your home with confidence.

1. Start with Your Monthly Income

To determine how much you can afford, start by evaluating your monthly income. Your gross income—the total amount you earn before taxes and deductions—is typically the primary figure lenders will consider when reviewing your mortgage application.

How to Calculate

Add up all sources of your monthly income, including salary, freelance work, investments, or other consistent income streams. Lenders generally prefer that your monthly mortgage payment, including property taxes and insurance, doesn’t exceed 25–30% of your monthly income.

2. Assess Your Monthly Debts: Calculating Your DTI Ratio

In addition to income, your monthly debts are a critical factor in determining your home budget. The debt-to-income (DTI) ratio is a key metric lenders use to assess affordability. This ratio shows the percentage of your monthly income that goes toward paying debts, including student loans, credit card payments, and other financial obligations.

How to Calculate

Add up all your monthly debt payments and divide that number by your gross monthly income. Multiply by 100 to get a percentage. Most lenders prefer a DTI ratio of 43% or lower for mortgage qualification.

Example

If your monthly income is $5,000 and your monthly debts are $1,500:

• DTI = ($1,500 / $5,000) x 100 = 30%

Managing your DTI is essential, not only for mortgage approval but for financial stability. If your DTI is high, consider paying off smaller debts before applying for a mortgage to make your budget more manageable and maximize your mortgage options.

3. Factor in a Down Payment

The amount you plan to put down on your home can significantly affect your monthly budget and long-term financial outlook. A larger down payment reduces your loan amount and your monthly payment, potentially saving you thousands in interest over the life of your loan.

Recommended Down Payment

While some loans allow for a down payment as low as 3%, a 20% down payment is ideal if you want to avoid private mortgage insurance (PMI). However, even if you can’t reach 20%, contributing as much as you can comfortably afford will give you a more manageable monthly payment.

Example

For a $300,000 home:

• 20% down payment = $60,000, resulting in a $240,000 loan amount
• 10% down payment = $30,000, resulting in a $270,000 loan amount

A solid down payment not only improves your loan terms but also gives you more equity in your home from the start. You may also explore options like down payment assistance and first-time homebuyer programs to make homeownership more affordable.

4. Consider Additional Costs: Property Taxes, Insurance, and Maintenance

It’s easy to overlook costs beyond the mortgage payment, but additional expenses like property taxes, homeowners insurance, and maintenance can impact your budget significantly. To create a realistic home budget, factor in these monthly and annual costs to ensure you can comfortably manage them alongside your mortgage.

Estimated Additional Costs

• Property Taxes: Property taxes vary by location and are generally calculated as a percentage of your home’s value.
• Homeowners Insurance: This protects against damage to your home and is often required by lenders.
• Maintenance and Repairs: Allocate 1–2% of your home’s value annually for maintenance costs, especially if purchasing an older property.

Accounting for these additional costs upfront can prevent financial stress later and help you enjoy homeownership without surprises.

5. Use a Mortgage Calculator to Fine-Tune Your Budget

A mortgage calculator is a valuable tool to help estimate what your monthly payment might look like based on different home prices, loan terms, and interest rates. This allows you to adjust your target home price within your budget limitations.

How to Use It

Enter your estimated loan amount, down payment, interest rate, and loan term into a mortgage calculator. This will provide an estimate of your monthly mortgage payment, including principal and interest. You can also input estimated property taxes and insurance to get a more comprehensive view of your future monthly payment.

Understanding your home budget and affordability is the first step toward a confident home-buying journey. By evaluating your income, managing your DTI, planning a down payment, and accounting for additional costs, you can set yourself up for financial success and long-term satisfaction. At My Easy Mortgage, we’re here to guide you through each step and help you make an informed decision. Whether you’re a first-time homebuyer or looking to move, contact My Easy Mortgage to get the support you need.

Author: Sam Wax, NMLS #336024

About the Author: Sam Wax is a licensed mortgage advisor with My Easy Mortgage, dedicated to helping clients achieve their homeownership dreams. With years of experience in the mortgage industry, Sam offers expert advice on budgeting, loan options, and the home-buying process. Reach out to Sam and My Easy Mortgage to start your journey with confidence.