How Much Home Can You Afford
How Much Home Can You Afford?
A Friendly Starter Guide for First-Time Buyers
Buying your first home can feel big - but that's because it is! It’s one of the biggest financial decisions you’ll make, and it’s normal to feel a bit overwhelmed. But don’t worry, you’re not alone.
Let’s break it down, step by step, with simple rules and real-life examples so you can move forward with confidence.
Key Terms to Know
Before we start, let's review some key terms. If you forget any of these, just scroll back up to this section!
| Term | Meaning |
|---|---|
| Principal | The amount you borrow to buy the home |
| Interest | The cost of borrowing that money, expressed as a percentage. You want this to be as low as possible because it affects your monthly payment. |
| PMI | Private Mortgage Insurance, required if you put down less than 20% |
| Gross Income | Your total income before taxes and deductions |
| Loan Term | The length of time you have to repay the loan, typically 15 or 30 years |
| Property Taxes | Taxes paid to your local government based on your home’s value |
| Home Insurance | Insurance that protects your home against damage, required by lenders |
| Down Payment | The money you pay upfront when buying a home. The more you put down, the less you borrow—and you might avoid PMI. |
| Emergency Fund | Savings set aside for life’s surprises—aim for at least three months of expenses before you buy. |
| Pre-Approval | A letter from a lender showing how much you can borrow. It tells sellers you’re serious and helps you shop with confidence. |
| HOA Fees | Monthly or yearly fees paid to a Homeowners Association, if your home is in a managed community. Covers things like landscaping or shared amenities. |
| FHA Loan | A government-backed mortgage with a lower down payment requirement—great for first-time buyers with less saved up. |
Home Price vs Principal
When you see a home listed for $300,000, that’s the price. But the principal is what you actually borrow after your down payment. If you put down 20% ($60,000), your principal is $240,000.
PMI vs Home Insurance
PMI (Private Mortgage Insurance) protects the lender if you default on your loan. It’s required if you put down less than 20%. Home insurance, on the other hand, protects you against damage to your home and is required by lenders.
1. Find Your Budget Sweet Spot
A good rule of thumb is the 28/36 guideline. In short, this rule says you should aim to keep your housing costs and total debt payments within these limits:
- Keep your housing costs (mortgage payment, property taxes, insurance) to about 28% of your gross income
- Keep your total debt payments (including housing, car loans, credit cards, student loans) to about 36% of your gross income
Example: If you make $60,000 a year (about $5,000 a month), aim for around $1,400 per month on your mortgage and no more than $1,800 per month on total debts.
2. Play with a Mortgage Calculator
Head to your favorite calculator and try entering:
- Home price
- Down payment (even 3.5% with an FHA loan can work)
- Interest rate (compare today’s 4% vs. 7%)
- Loan term (15 vs. 30 years)
Watch how each tweak changes your monthly payment. You might see that moving from 20% to 5% down only adds $75 to $100 a month - small adjustments that help you decide what’s right for you.
Don't have a calculator handy? No problem! You can use our mortgage calculator to get started.
3. Remember All the Extras
Your true monthly cost goes beyond principal and interest. Factor in:
- Property taxes
- Homeowner’s insurance
- PMI if you put down less than 20%
- HOA fees, if applicable
When Julie, a first-time buyer on a tight budget, added these in, she realized her “dream house” payments were $200 more than she thought. She then found a similar home a few blocks over and kept her emergency fund intact.
4. Saving or Finding Your Down Payment
- Ideal goal: 20% down to skip PMI
- Low-income options: FHA loans (3.5% down), local grants, or first-time buyer programs
- Even adding $25 a week to a special savings jar can add up to $1,300 in a year - little steps build big results
Saving for a down payment? Learn about the best account types for your timeline to make sure your money is working as hard as possible. Consider keeping your down payment fund in a high-yield savings account while you save - every extra dollar in interest helps you reach your homeownership goal faster.
5. Get Mortgage-Ready
Before you shop:
- Check your credit score and clear small debts
- Build an emergency cushion (aim for three months of exepnses)
- Get pre-approved - this letter shows sellers you’re serious and locks in your rate for a short time
Quick Look: Monthly Payments
| Scenario | Monthly P&I* (30-year) |
|---|---|
| $200,000 @ 4% interest, 20% down | $760 |
| $200,000 @ 7% interest, 20% down | $1,060 |
| $200,000 @ 4% interest, 5% down (PMI) | $835 |
| $200,000 @ 7% interest, 5% down (PMI) | $1,150 |
*P&I = principal and interest (PMI extra if under 20% down)
Ready to Take the Next Step?
You now have a clear sense of how much house you can afford. Use these tips to guide your search, explore down payment help, and lean on pre-approval to make offers with confidence. Even small moves like shaving $50 off your monthly bills or saving $10 a week bring you closer to homeownership.
You’ve got this!