Advice
Buying a home is both a dream come true and a leap of faith. You’re filled with hope, imagining the life you’re about to build. At the same time, it’s easy to feel overwhelmed. Maybe it’s your first house. Maybe you’re making room for a growing family. You could be starting fresh in a new city or downsizing after a big life change.
No matter the reason, one question always comes up: How much can I afford to spend on a home?
The answer depends on more than just income or home prices. It’s about understanding the full cost of ownership and how it fits into your everyday life. Here’s how to find a number that makes sense for your budget, your lifestyle, and your future.
It’s About More Than the Loan
Your monthly mortgage payment covers more than just the money you borrow. It includes several different costs that work together to keep your home and your finances on track.
Most monthly housing payments include four key parts, often referred to as PITI:
- Principal is the amount you borrowed and are now paying back.
- Interest is the cost of borrowing that money, based on your interest rate.
- Taxes refer to property taxes paid to your local government, which fund schools, roads, and public services.
- Insurance covers homeowners insurance, which protects your house in case of damage, fire, or other emergencies.
These costs are often bundled into a single monthly payment, which your lender collects and uses to pay your taxes and insurance from an escrow account.
In addition to those four parts, there are a few other expenses that might apply:
- Private Mortgage Insurance (PMI) is usually required if your down payment is less than 20 percent. PMI protects the lender and adds to your monthly cost.
- Homeowners Association (HOA) Fees may apply if your property is part of a condo, townhouse, or neighborhood with shared services like landscaping or snow removal.
- Utilities and Maintenance are ongoing costs like electricity, water, internet, trash pickup, and repairs. While they don’t show up on your loan statement, they affect your overall monthly budget.
A house might seem affordable at first. But once the other costs roll in, it can be too much. You could qualify for a higher loan amount but still struggle to keep up.
You might have to pass on small comforts like dinners out, hold off on upgrading your car, or skip that vacation you’ve been dreaming about. Over time it makes it harder to save for bigger goals, like starting your own business, helping your kids with college, or saving for retirement.
Think about what feels right to you. Not just on paper, but in real life. The right home should bring stability and peace of mind. It shouldn’t hold you back from the things that matter most.
What Lenders Look At
Once you have a budget in mind, the next step is to see how it lines up with what lenders consider affordable. Is your budget in line with what lenders have found works best?
Over time, they’ve developed formulas based on real-life experience— tools designed to help people borrow within a range that keeps monthly payments manageable. One of the most important tools they use is something called your debt-to-income ratio, or DTI.
This number compares how much money you earn each month to how much you already spend on debt payments. That includes credit cards, student loans, car loans, and your expected mortgage.
Lenders often follow the 28/36 rule. This means that no more than 28 percent of your gross monthly income should go toward housing, and no more than 36 percent should go toward all debt combined.
For example, if you earn $5,000 per month before taxes:
- Your housing costs should stay below $1,400
- Your total debt payments, including your mortgage, should stay below $1,800
These are common guidelines, but they’re not the same for every loan. Some programs, like FHA loans, allow higher limits. If you’re curious about those, you can read more in our FHA Mortgage Basics article.
What Else Affects What You Can Afford
Your DTI is just one part of the picture. A few key factors can make a big difference in how far your homebuying budget can stretch.
Your Existing Debts
Monthly payments on credit cards, car loans, student loans, or personal loans all count toward your debt-to-income ratio. The higher your existing payments, the less room you have in your budget for housing.
If you’re close to buying a home, one way to increase affordability is to pay down—or pay off—smaller debts. Even reducing a monthly payment by $50 or $100 can give you more room to work with.
Your Credit History
Your credit score doesn’t just affect loan approval— it also impacts your interest rate. The higher your score, the better your chances of qualifying for lower interest, which means lower monthly payments and less paid over time.
To improve your credit profile before applying:
- Make all payments on time
- Pay down credit card balances
- Avoid opening new credit lines unless necessary
If you’re a 1st Source client, we have a free credit score app built into your online banking. And it does more than show your score. It lets you simulate different choices and gives helpful tips to help you reach your goals faster.
Your Down Payment
The size of your down payment affects how much you borrow. A larger down payment means a smaller loan, which usually leads to a lower monthly payment.
If you’re not planning to buy right away, building up your down payment can be one of the smartest moves you make. It can also help you avoid extra costs like private mortgage insurance, depending on the loan program you qualify for.
Even setting aside a little bit each month can add up over time. Consider creating a separate savings account just for your future home.
The Loan Term You Choose
Shorter loan terms come with higher monthly payments, but they reduce the total amount of interest you pay. Longer terms do the opposite—they spread the loan out over more time, lowering your payment but increasing your total cost.
If monthly flexibility matters more than long-term savings, a longer term might be worth considering. Some buyers start with a longer term, then refinance or pay extra when their budget grows. Others choose shorter terms to pay off their homes faster.
Take the Next Step
Buying a home should fill you with hope, not stress. When you understand your full monthly costs, you’ll make choices that support your lifestyle and long-term goals.
To begin, try out our mortgage calculators. They can help you test different income, down payment, and loan scenarios so you can see what’s realistic for your budget.
And if you’re ready to explore your options with an expert, 1st Source Bank can talk you through loan types that match your needs. We’re here to help you make confident, informed choices without pressure or guesswork.