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How Much House Can I Afford?

There are several factors that determine how expensive of a house someone can afford, including credit score, income, debt-to-income ratio, down payment amount, and more.
When determining how much house/mortgage you can afford, lenders use the 28/36% rule, which we’ll discuss in this article.
At Credit Union of Southern California (CU SoCal), we make getting a mortgage easy! 
Call 866.287.6225 today to schedule a no-obligation consultation and learn about our home equity lines of credit, auto loans, personal loans, checking and savings accounts, and other banking products. As a full-service financial institution, we look forward to helping you with all of your banking needs.Using a mortgage affordability calculator can help you determine how big of a mortgage you can afford. Use this Mortgage Qualifier Calculator to see how much house you can afford.

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Calculating How Much House You Can Afford With The 28/36 Rule

The 28/36 rule states that a borrower’s monthly mortgage payment should not be more than 28% of their gross monthly (i.e., pre-tax) income, and no more than 36% of their total debt. This rule is more commonly known as a debt-to-income (DTI) ratio. 

Understanding Your Homeowner Expenses

If you’re thinking about buying a house or are already home shopping, it’s important to have a good understanding of these factors that affect a house's affordability:
Interest Rate. The higher the mortgage interest you get, the more in total interest you’ll pay over the term of your loan. Conversely, the lower the interest rate, the less you’ll pay in totally interest. This matters because homebuyers need to make sure they will be able to afford their monthly mortgage payment today, and into the future.
Loan Term. Term is another way of saying the length of the loan. Loan terms are commonly 10, 15, 20, and 30-years. The longer the term, the lower the monthly payment will be because the total loan is spread out over more time. Shorter term loans have higher monthly payments.
Property Tax. Taxes can vary widely depending on each town and county. Most lenders require that borrowers “escrow” their property tax so it’s added to the total monthly mortgage payment. As you calculate what house you can afford, don’t forget to calculate property tax into your expenses.
Homeowner's Insurance. Lenders will require that buyers have a homeowner’s insurance policy shortly before the loan closes. The policy monthly premium is typically paid through escrow as well, at least at the start of the mortgage loan. Some lenders allow property tax and insurance to be paid directly by the borrower (“waive escrow”) once there is enough equity in the home.
Flood Insurance. Some areas, coastal and in-land, are in FEMA flood zones. Be sure to ask if the area you’re interested in is a flood zone. If so, you’ll need a separate flood insurance policy.
Home Maintenance. All homes need maintenance, whether it’s lawn care, irrigation, plumbing, electrical, or painting. As you calculate how much house you can afford, don’t forget to set money aside each month for repairs and maintenance.
Utilities. This includes water, electric, sewer, and sanitation bills. Some home sellers may be willing to show you their current bills, to give you an idea of what costs to expect.
Closing Costs. Most mortgage loans have closing costs, the exception being government-backed loans that may have low or no closing costs. Once you’ve started the mortgage approval process your lender must provide you with a “good faith estimate” of closing costs.
Private Mortgage Insurance (PMI). All buyers who put less than 20% down on a purchase will pay PMI, which will be added to the monthly mortgage payment. The exception is government-backed loans that may have low or no PMI requirement. This insurance protects the lender in case the borrower defaults.
Homeowners Association (HOA) Dues. Condominiums, co-ops, and houses located in gated communities charge association dues or fees for the purpose of maintaining the community amenities and services, including landscaping, security, swimming pool and other facilities, etc. Ask what the HOA’s dues are and whether they must be paid monthly or quarterly.

How To Increase Your Home Affordability Budget

Here are some strategies you can implement right away to increase your likelihood of being able to afford a mortgage, and get approved.
Lower Debt-to-Income Ratio (DTI). Lenders look at debt and income to create a borrower’s DTI ratio. Lenders want to be sure that they are lending money to people who have enough incoming income to repay their current and future debt (e.g., a mortgage). To calculate your debt-to-income ratio, add up all your monthly debt payments and divide them by your gross monthly income (before taxes). Most lenders look for a DTI ratio of 43% or less, although some will accept up to 50%. To lower your DTI you can increase your earnings and/or pay-off debt.
Earn Extra Income. Lowering the debt you owe goes hand-in-hand with increasing your income. The more you earn, the more debt you can pay-off, and the more money you can save. We recognize that earning more money can be challenging; it could mean asking for raise, changing jobs, or taking a second job.
Improve Credit Score. Paying bills and loans on time and not “maxing-out” your available credit will boost your credit score. The higher your credit score, the easier it will be to get approved for a mortgage.
Save For A Larger Down Payment. A larger down payment means you don’t need to borrow as much and you’ll pay less in monthly mortgage payments. Start saving by putting more of your monthly earnings into a savings account.
Cut Unnecessary Spending. You may save thousands of dollars a month by reducing your unnecessary expenditures and putting that money into a savings account. Reduce or eliminate takeout food orders, reduce monthly recurring costs, such as premium cable, streaming services, or gym membership.
Cancel Expensive Vacations. Vacation time is important to emotional well-being, but the price tag for a vacation can be in the thousands. If you’re serious about purchasing a home, one big way to save for a down payment is to take a moderate priced staycation, rather than an expensive vacation.

Federal Loans

Federals loans are government-insured mortgage programs that are offered by lenders, including credit unions and banks. The three types of federal loans were created to help people with low- and moderate-incomes make homeownership a reality by making homes more affordable.

FHA Home Loan

Popular among first-time homebuyers, FHA loans require a 580 FICO score. Borrowers with at least a 580 or higher may be eligible for an FHA loan that requires only 3.5% down payment on a home purchase. It is possible to qualify for an FHA loan with a FICO score as low as 500, with a down payment of 10%.

VA Home Loan

Insured by the U.S. Department of Veterans Affairs, VA loans are available to qualifying U.S. Armed Forces Veterans, Active Duty Service Members, certain Reservists and National Guard members, and certain surviving spouses of deceased Veterans. VA loans often do not require a down payment. There is no minimum credit score requirement. Instead, VA requires a lender to review the entire loan profile. Learn more about VA loans.

USDA Loans

To purchase a home with a USDA loan, the home must be located in an eligible rural area as defined by USDA United States Department of Agriculture). In order to be eligible for a USDA loan, household income must meet certain guidelines. Eligible applicants may purchase, build, rehabilitate, improve or relocate a dwelling in an eligible rural area with 100% financing.

Where To Get An Affordable Home Loan

Although banks and online lenders offer mortgages, credit unions are known for providing unique advantages, including concierge member services, flexible lending requirements, lower interest rates on mortgages and other loans, better rates on savings and checking accounts, and more. 
CU SoCal Mortgage Features And Benefits Include:
  • Down payments as low as 3%.
  • Fast pre-approval.2
  • Competitive rates starting at 2.250%/3.813%APR.
  • Financing up to $1.5 million.
  • Flexible terms of 10-, 15-, 20-, and 30-years.
  • Fast financing.
  • Professional guidance.
  • Low, flat lender fee of $995.
  • Realtor rebates.
Learn more about getting a mortgage at CU SoCal.

Why Savvy Consumers Choose CU SoCal

For over 60 years CU SoCal has been providing financial services, including mortgages, Home Equity Loans, HELOCs, car loans, personal loans, credit cards, and other banking products, to those who live, work, worship, or attend school in Orange County, Los Angeles County, Riverside County, and San Bernardino County
Please give us a call today at 866.287.6225 today to schedule a no-obligation loan consultation with a CU SoCal Member Services specialist.

Get Started on Your Home Loan Today!

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Credit Union of Southern California (CU SoCal) is a leading financial institution empowering those who live, work, worship, or attend school in Orange County, Los Angeles County, Riverside County, and San Bernardino County to reach their goals and build strong financial futures. CU SoCal provides access to convenient money management services and offers competitive rates and flexible terms on auto loans, mortgages, and VISA credit cards—turning wishing and waiting into achieving and doing.


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