First-time Homebuyer 101: Homebuying Power

First-time Homebuyer 101: Homebuying Power

The #1 question for first-time homebuyers is “How much can I afford?”

Your house budget is primarily determined by the following:

  • 💸 Income
  • 💳 Debt
  • 💲 Assets (AKA cash)
  • 📊 Credit score
  • 🏦 Mortgage (loan type, lender, rates)

💸 Income is the #1 factor. Mortgage lenders use your income to establish the monthly housing payment you can afford. More income means more Homebuying Power.

💳 Your income must be able to support your debt. A lender will factor in your existing debt obligations (e.g. car lease and student loans) when setting your budget. A debt-to-income ratio (DTI) of 36% is a good target. Multiply your monthly pre-tax income by 36% to get a sense of the total monthly payment (housing + other debt) you can carry. 🎯

👉  The maximum mortgage you can get approved for (in some cases, up to a 50% DTI) and what you can afford are not the same thing. Make sure you can still cover your non-housing expenses comfortably.

💲 Cash is king. The bigger your down payment is, the smaller your mortgage will be, which means a lower monthly payment (and a bigger budget). You should aim to save up at least 5% of your target home purchase price to cover your up-front costs when you buy. 

📊 A higher credit score is always better. Mortgage lenders use your credit score to see if you qualify for a mortgage in the first place and to set the interest rate (or price) for your loan. A 20-point increase can save $10,000+ in interest over the life of a loan and expand your budget.

🚨 Spoiler alert: the credit score you are tracking (VantageScore 3.0 or FICO 8) is not the one that mortgage lenders use (FICO 2, 4, and 5).

🏦 In addition to your personal financial profile (see above), your budget will be influenced by:

  • Macro-economic factors (e.g. interest rates)
  • The type of loan (e.g. 30 year, ARM, 15 year)
  • The lender (i.e. some lenders have better pricing and lower fees)

How do I determine my Homebuying Power? Let us help! Gravy’s Homebuying Power calculator uses your income, debt, credit, assets, and other factors to estimate your current budget. Plus, get tips and tools to increase your Homebuying Power.

Get started right from the Gravy app! Track and build your Homebuying Power (it’s free).

❤️ Gravy is designed to help first-time homebuyers maximize their Homebuying Power so you can buy with confidence on your schedule.

Check out our other first-time homebuyer guides:

Will Dunn
Will Dunn
Gravy Co-Founder and Chief Growth Officer
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