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WalletPrep worksheet · Housing

How much house can you afford?

Name ____________________ Date __________

Key ideas

  1. Keep the full payment near 28% of gross. That includes principal, interest, property tax, insurance, mortgage insurance and HOA fees. On $7,000 a month, 28% is $1,960.
  2. Taxes and insurance shrink the loan you can carry. Subtract them from your target payment first. What remains pays principal and interest, and that sets the loan size.
  3. Approval is a ceiling, not a target. Lenders look at whether you can repay. Your budget also has to fit saving, repairs and the rest of your life.

Vocabulary

Gross income
Your total pay before any taxes or deductions are taken out. Salary offers and loan applications usually ask for this number.
Principal
The amount you borrowed, or the part of your balance that is still owed, not counting interest.
Down payment
The cash you pay toward a home's price yourself at closing. A mortgage covers the rest.
Debt-to-income ratio
Your total monthly debt payments divided by your gross monthly income, shown as a percentage. Lenders use it to judge whether you can take on a new payment.
Credit score
A 3-digit number, usually from 300 to 850, that predicts how likely you are to repay debt on time. Lenders use it to set rates.
Conforming loan limit
The largest mortgage that Fannie Mae and Freddie Mac can buy, set each year by the FHFA.

Work it out

Alex earns $84,000 a year ($7,000 a month), pays $400 on a car loan and has $40,000 for a down payment. Assume a 6.5% rate on a 30-year loan; real rates vary.

  1. 28% of $7,000 gross
  2. Property tax
  3. Homeowners insurance
  4. Mortgage insurance (PMI)
  5. Left for principal and interest
  6. Rate and term
  7. Loan $1,410 a month carries
  8. Down payment
  9. Home price ceiling

Check yourself

  1. Your gross income is $6,000 a month. What total home payment does the 28% rule suggest?

    • A. $1,500
    • B. $1,680
    • C. $1,800
    • D. $2,160

  2. Your target payment is $2,000, and taxes plus insurance are $500. How much is left for principal and interest?

    • A. $1,500
    • B. $2,000
    • C. $2,500

  3. What is the difference between a lender's approval and what you can afford?

    • A. There is none
    • B. Approval is always lower than what you can afford
    • C. Approval is the most a lender will lend; your budget decides what fits
    • D. Approval includes your savings goals

Your turn

Multiply your gross monthly pay by 0.28. Subtract a local estimate for property tax and insurance, then put the rest into the mortgage calculator at a realistic rate to see your loan and price ceiling.

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Answer key

How much house can you afford?

Work it out

  1. 28% of $7,000 gross$1,960
  2. Property tax− $300
  3. Homeowners insurance− $150
  4. Mortgage insurance (PMI)− $100
  5. Left for principal and interest= $1,410
  6. Rate and term6.5%, 30 years
  7. Loan $1,410 a month carries$223,077
  8. Down payment$40,000
  9. Home price ceiling= $263,077
  1. $7,000 × 0.28 = $1,960. Minus tax $300, insurance $150 and PMI $100 leaves $1,960 − $550 = $1,410 for principal and interest.
  2. At 6.5% for 30 years, $1,410 a month pays off a loan of about $223,077. Add $40,000 down for a price ceiling near $263,000.
  3. DTI check: ($1,960 + $400) ÷ $7,000 = 33.7%. Alex keeps closing costs and an emergency fund separate from the $40,000.

Check yourself

  1. B. $1,680 $6,000 × 0.28 = $1,680. That covers principal, interest, property tax, insurance and any mortgage insurance or HOA fees.
  2. A. $1,500 $2,000 − $500 = $1,500. Only that part pays down the loan and its interest, so it sets the loan size.
  3. C. Approval is the most a lender will lend; your budget decides what fits The CFPB notes that how much a lender will lend is not the same as how much you should spend. Your budget has to fit saving and repairs too.