How much house can you afford?

Whether you’ve just started on your homebuyer journey or you’re a seasoned homeowner ready for an upgrade, you’re likely wondering, “How much house can I afford?”

Many people assume that the answer to this question is just a matter of determining the biggest mortgage loan they can qualify for, but that’s not always the case. “We can qualify them for their maximum amount, but that doesn’t necessarily mean it’s the best monthly payment for them,” said Jhovani Becerra Reyes, a Denver-based community mortgage banker with BOK Financial Mortgage®.

For that reason, one of the first questions he asks clients is the maximum monthly mortgage payment they feel comfortable with—and that’s only the start of the discussion. “We want them to have a total picture of the full cost of homeownership,” he said.

That picture includes principal and interest payment for the loan, as well as other housing costs such as property taxes, homeowner’s insurance and, in some cases, mortgage insurance. He also reminds borrowers that, even with a fixed-rate mortgage, portions of their monthly payment can still change over time. “The payment on the principal and interest is fixed, but the payment for tax and insurance is subject to change year by year,” he said.

Some buyers also overlook the cost of homeowners’ association (HOA) dues, utilities and ongoing maintenance. “When you own a home, unexpected expenses are bound to come up,” Reyes said. “It could be major expenses like a roof, furnace or water heater replacement. We recommend that clients plan for and budget for these repairs.”

Additionally, it’s important for a prospective homebuyer to consider their monthly mortgage payments as part of the larger budget that makes sense for their lives, Reyes said. He encourages buyers to think beyond the house payment and leave room for emergency savings, retirement contributions, vacations and other life goals—as well as what they are trying to achieve by buying a home.

“No two buyers are the same,” he explained. “One may be single and just want a condo, while another may need a larger home to accommodate a growing family. Every individual’s needs, priorities and financial goals are different.”

How lenders determine mortgage loan qualifications

Although how large a loan you qualify for isn’t the only factor you must consider, it’s still an important one, and the determination is more multifaceted than you might think.

As Reyes said, “Income is definitely an important piece of the puzzle, but it’s not the only factor that we look at.” Additionally, a borrower’s debt, credit profile, savings, employment history and even long-term goals can all influence what they can realistically afford.

For that reason, two people with similar incomes can qualify for very different mortgage amounts. The difference often is a matter of existing debt, specifically a borrowers’ debt-to-income ratio, usually called DTI. This ratio measures a person’s monthly obligations compared to their monthly gross income. The maximum DTI that lenders usually can allow is around 50 to 55%, Reyes said.

Since DTI plays such a significant role in determining how much a buyer can borrow, reducing debt often has the biggest impact on a borrower’s qualifications for a mortgage, Reyes said. However, he noted that not all debt is created equal. In some cases, paying off a smaller loan with a large monthly payment can improve your borrower profile more than paying off a larger balance with a smaller minimum payment.

The debts buyers often forget about

One of the most common surprises during the prequalification process is discovering debts that borrowers didn’t realize would affect their mortgage application. Student loans top the list, Reyes said. “Even if their monthly payments are deferred, we still have to calculate a payment for them,” he explained.

Another growing category of forgotten debts is “buy now, pay later” financing. Although they usually don’t show up in credit reports, Reyes said lenders look for these payments in a prospective borrower’s bank statements.

He also frequently encounters prospective homebuyers whose affordability is impacted by child support obligations, spousal maintenance and co-signed loans that borrowers assumed wouldn’t be counted—but they all have to be taken into account.

Credit scores matter, but not always in the way buyers expect

Credit scores are another area where buyers are often caught off guard. Reyes said borrowers sometimes monitor their credit through consumer apps and expect lenders to see the same score.

“What they’ll find is that banks use a FICO model, which is different from what some applications use, so their credit score may be different from what they’re expecting.”

Improving your credit can expand mortgage options, improve loan terms and potentially lower private mortgage insurance costs. “The better your credit score, the more options you have,” Reyes said. “If you’re able to get your credit score into the 700s, that will definitely give you more options in terms of the loan options you’re eligible for.”

When to contact a mortgage banker

People who aren’t quite ready to buy a home yet but are considering it in the future could still benefit from talking with a lender sooner rather than later, according to Reyes. Understanding your credit, debt and available loan programs can help you build a roadmap toward homeownership.

For instance, you might learn that you qualify for down-payment assistance programs that can help cover all or part of your down payment and, with proper planning, your closing costs as well. “A lot of times, the clients just have to meet the minimum investment requirement for some of these programs, which can be as little as $1,000,” he said.

Lastly, if you’re wondering whether homeownership is worth all the effort, Reyes points to the long-term benefits. “Home ownership is not just about owning a home,” he said. “You’re building equity with the monthly payments that you’re making, and you’re also building equity on the appreciation of the property. If you want to build generational wealth, home ownership is definitely one of the best ways to start.”

Go to Bank of Albuquerque's free online affordability calculator to see how much house you can afford.

To estimate your monthly mortgage payment, visit Bank of Albuquerque's free online mortgage payment calculator.