How much home can you afford? First, ask how much you can save

It’s easy to figure out how much you can spend on rent every month. But when it comes time to buy a home, where do you even begin to figure out what you can buy? How much home you can afford depends on many different things – like your income, credit score, and mortgage rates when you buy. However, you can increase your buying power just by changing the way you save for a down payment. Let’s find out how.

3 ways to calculate how much home
you can afford

Method #1: The rapid test

The fastest way to estimate how much home you can afford is to take your annual household income and multiply it by 3. Then, add your down payment. For example, if you and your partner make a combined $100,000 per year and you can put $30,000 down, you should expect to spend a maximum of $330,000 on a home.

Keep in mind that this method isn’t the most accurate since it leaves out a lot of important details, like the interest rate you’ll qualify for and whether you have additional debt to pay off. It also fails to consider future increases in your household income, especially if you’re still early in your professional career. However, it can be a good starting point if you’re in the early budgeting stage.

Method #2: Check your income ratios

There are two different ratios mortgage lenders like to look at when deciding how much house you qualify for. It’s easy to check these yourself – all you need to do is grab your most recent paycheck and find your monthly income before any taxes or deductions.

The front-end ratio measures your monthly housing expenses in relationship to your income. This includes not just your mortgage payments but other expenses like home insurance, property taxes, and private mortgage insurance (PMI) if you’re required to have it. To use the front-end ratio, multiply your monthly income by 28%. This number is the maximum you should spend on housing each month.

The back-end ratio looks not just at how much you owe towards your mortgage each month, but your payments towards other types of debt, too. This might include payments towards credit card balances, student loans, and car loans, just to name a few. As a general rule, your debt payments shouldn’t exceed 36% of your monthly income.

One more time, here's a breakdown:

What it measures
Items considered
Max percent of your monthly income
Front-end ratio
Your monthly housing expenses
Mortgage, insurance, property taxes
Back-end ratio
Your total monthly debt obligations
Mortgage, credit card payments, loan payments

Now, let’s try calculating both ratios for a couple with a combined annual income of $90,000. Here’s what that would look like:

Annual household income
Monthly gross income
Front-end ratio (28%)
Back-end ratio (36%)
Method #3: Use your savings plan as a launchpad

If you’ve already built a savings goal into your budget, why not use that (plus your monthly rent) as practice for the mortgage you’ll have to pay someday? If you can comfortably pay both every month, use that as a guide for the mortgage payment you can afford. However, if you find yourself consistently falling short of the savings goal you set, you’ll probably need to aim for a lower mortgage commitment.

The longer you save, the more home you can afford

It’s not unusual for first-time homebuyers to finance a house with as little as 3% to 6% down. For a $200,000 home, that means saving only $6,000 to $12,000 before you apply for a mortgage.

However, there are advantages to spending more time building up your down payment savings fund. Most lenders are willing to offer you a lower interest rate if you have more cash to put down. Buying a home earlier, with a down payment of less than 20%, also means you’ll also have to pay for private mortgage insurance (PMI).

The bottom line: taking an extra year or two to save could increase your homebuying budget by tens of thousands of dollars – or more.

... but pay attention to interest rates, too

There’s one caveat. Mortgage rates fluctuate all the time, and it could be to your advantage to accelerate the homebuying process if they fall particularly low. For example, 30-year mortgage rates were historically low at the end of 2020 due to the COVID-19 pandemic, remaining under 3% for seven consecutive months. If you see rates dropping before you’ve fully met your down payment savings goal, it might be worth talking to a lender about where you stand.

Always be ready to adapt

The only predictable thing about life is its unpredictability. While the guidelines we’ve given are a good place to start, every homebuyer’s situation is different – and can change at any time. If you do get thrown a curveball, don’t let it throw off your entire savings plan! It’s okay to adjust your strategy and goals to reflect life developments (like the emergency vet bill for that sock your dog ate.)

How Gravy can help you save for a home

We know all of this sounds a little complicated, but it doesn’t have to be. We created Gravy to make the homebuying process easier. Download the Gravy app for free and you’ll get lots of tools that do the math for you, like a home savings goal planner and a mortgage cost calculator.

Gravy also helps you understand how factors like your credit score affect how much home you can afford. In fact, working to improve your credit score as you’re saving for a home is another surefire way to increase your home shopping budget.

Keep reading: Should you rent or buy? Find out here