Using an affordability calculator to estimate mortgage costs

Using an affordability calculator for mortgage costs is helpful, but how do you know if you can afford the payment? How do you know how much you need for a down payment or closing costs? You can find the answer by learning how much it costs to buy a home and creating a realistic budget to do so. That starts with learning how to buy a home and preparing your finances to afford it.

Determine your financial capacity

If you're a first-time home buyer, start your journey by evaluating your personal finances and figuring out what percentage of your take-home pay you can afford to spend on a mortgage.

Evaluate your gross monthly income

Your gross monthly income is your earnings before taxes and other deductions. Net income, on the other hand, is your take-home pay.

Your gross income is used to calculate your debt-to-income ratio and your housing expense ratio. These figures show how much of your income is needed to pay your housing expenses. It's typically expressed as a percentage, and it helps both you and mortgage lenders gauge how affordable your home loan is.

Itemize your expenses

Having a budget can help you understand how much of your income goes toward paying debts, bills, and other expenses. It's important to figure out how much you can reasonably afford to put toward your mortgage and other housing-related expenses.

One popular approach is the 50/30/20 rule. You allocate 50% of your after-tax income to your needs, 30% to your wants, and the remaining 20% toward paying back your debt and savings.

Check your credit score

Mortgage lenders will pull your credit score to evaluate how creditworthy you are.

A higher score suggests you reliably pay your debts. Lenders often offer borrowers with high credit scores more favorable interest rates. Lower scores mean you're a riskier borrower. Lenders often charge borrowers with lower credit scores a higher interest rate.

You can order a free copy of your credit report from each of the three major credit bureaus – Experian®, Equifax®, and TransUnion® – at AnnualCreditReports.com.

If you need to improve your credit score, pay your bills on time, pay down your debts, and avoid opening new lines of credit.

Budgeting for initial costs

Even when you're taking out a mortgage to finance a home purchase over 15 or 30 years, there are up-front expenses that must be paid when you buy a home. Here's what you need to be ready for.

Saving for a down payment

The down payment is one of the most expensive costs of your home. According to the National Association of REALTORS®, the median down payment for first-time home buyers is 9%.

To save for a down payment, you'll want to set a target. You can use a down payment calculator to determine how much you'll need to tuck away.

Then, look at your savings, income, and any other resources available to you. You may be eligible for down payment assistance programs, or you may have family members or close friends willing to give you money for a down payment.

You'll want to explore your borrowing options, as different loan types have different down payment requirements.

VA and USDA loans require no down payment.¹ However, VA loans are available only to eligible military personnel, veterans, and their surviving spouses. USDA loans are available only to low- to mid-income borrowers buying a home in a specific rural area. Rocket Mortgage^® doesn’t offer USDA loans at this time.

The most common loan type is a conforming conventional loan. You need a minimum 3% down payment for a fixed-rate conforming loan, and 5% for an adjustable-rate conforming loan. Note that you'll have to pay for private mortgage insurance if your down payment is less than 20% on a conventional loan.

FHA loans are aimed at borrowers with lower credit scores. For FHA lenders like Rocket Mortgage, a minimum down payment of 3.5% is needed if your credit score is 580 or higher. Other lenders offer FHA loans to borrowers with credit scores between 500 and 579 who can afford a down payment of at least 10%.

If you're buying a more expensive home and need to borrow more than the conforming loan limit, you need a jumbo loan. Lenders set their own requirements for jumbo loans, but you can expect to need at least 10% to 20%.

Estimating closing costs

In addition to the down payment, you need to pay closing costs. These are fees you must pay to fund your mortgage and transfer legal ownership of the property from the seller to you. They typically include origination fees, attorney fees, appraisal fees, and inspection fees.

Closing costs must be paid at closing and typically range from 3% – 6% of the loan amount. Your closing costs depend on several factors, such as the type of loan you take out and the location of the home you're buying.

Planning for day one expenses

Here are some of the most common expenses that you'll pay from day one of homeownership.

Mortgage payments

Your monthly mortgage payment is determined by factors such as your interest rate and how much you're borrowing for a home purchase. If you're looking to afford a home, calculators can help you estimate the monthly payments.

Homeowners insurance

Mortgage lenders require borrowers to carry homeowners insurance.

According to NAR, the national average homeowners insurance premium is $2,377, which breaks down to about $215 a month.

Many homeowners set up an escrow account with their lender to add their homeowners insurance costs to their monthly mortgage payment.

To help you get the best rate for you and make homeownership more affordable, you can compare policies from different companies.

Property taxes

Property taxes, also known as real estate taxes, are levied by state and local governments. This money is used to pay for services such as roads, schools, public transportation, firefighters, parks, and the police.

To figure out how much you might owe on property taxes, you'll want to research values and tax rates for the area you're planning to buy a home in. As with homeowners insurance, many homeowners set up an escrow account and add their property tax payments to their monthly mortgage payment.

HOA fees and utilities

If you buy a home that's part of a homeowners association, you'll need to pay dues. HOA fees cover the cost of services and maintenance for the entire community, such as trash pickup, parking, common areas, and external building maintenance for condos.

You'll also need to pay for your utilities, such as electricity, water, natural gas, and internet service.

Planning for the unexpected

Owning a home also comes with unforeseen expenses. Here's how to be ready for the bill when life throws you a curveball.

Establish an emergency fund

Should you face a medical emergency, chronic illness, or job loss, an emergency fund can help cover costs related to your home.

It's a good idea to establish a separate emergency fund just for your home. The ideal amount depends on your situation and what you can reasonably save. One suggestion is to aim for an additional $5,000 to $10,000 for your general emergency savings or set it aside in a separate savings goal.

Anticipate maintenance

While we'd like our homes to remain in the same condition indefinitely, it's important to prepare – and save for – future maintenance costs. This can include everything from a new roof or new windows to pest management.

Home maintenance costs are at an all-time high, according to Forbes. To help you get your head around what maintenance costs to expect over the next few years, make sure you order a home inspection when you buy. It can alert you to potential repairs, such as a roof that may need to be replaced in a few years.

Home warranties can help offset these costs. These are contracts that can be renewed annually that cover some of the cost of repairing or replacing home systems or appliances.

Exploring financial assistance options

Down payment assistance options can mean securing a home loan on more lenient terms. We touched on financial assistance options earlier – but here, we'll dig into the details:

Understanding down payment assistance programs

Down payment assistance programs are designed to make the up-front cost of buying a home more affordable.

To qualify for down payment assistance, you'll need to meet the loan's specific criteria. This might include requirements such as living in a particular county, being a first-time homebuyer, having a minimum credit score, or agreeing to live in the house for a certain number of years.

A few down payment assistance programs include One+ by Rocket Mortgage, which covers 2% of your down payment when you make a 1% down payment, giving you 3% for a down payment.²

If you can save 3% for your down payment, HomeReady and Home Possible offer a credit to help you with out-of-pocket costs.^3,4

FAQ

Let's look at some commonly asked questions when it comes to setting a budget when buying a home:

How much house can I afford based on my salary?

To figure out how much house you can afford based on your salary, you can use the 28/36 rule. This means that your monthly housing payment, which includes the principal, interest, taxes, and insurance, can be no more than 28% of your gross monthly income. Your total debt payments shouldn't go over 36%. You can use this affordability calculator from Rocket Mortgage to estimate how much you can afford.

What if I can’t afford a 20% down payment?

While a 20% down payment means you won't need to pay for PMI, you can get a home loan for a much lower amount. For example, FHA loans offer down payments as low as 3.5%, and USDA and VA loans don't require any down payment.

The bottom line: Weigh all the costs when buying a home

Creating a realistic housing budget means understanding the expenses you can expect when buying a house. This starts with the up-front costs such as the down payment plus closing costs and continues with the monthly mortgage payment and ongoing monthly expenses such as property taxes, homeowners insurance, HOA fees, utilities, and maintenance.

If you're ready to explore your borrowing options for buying a home, you can get started with Rocket Mortgage.

This article is for informational purposes only and is not intended to provide financial, investment, or tax advice. You should consult a qualified financial or tax professional before making decisions regarding your retirement funds or mortgage.

¹ Rocket Mortgage is a VA-approved lender, not endorsed or sponsored by the Dept. of Veterans Affairs or any government agency.

² Client will be required to pay a 1% down payment, with the ability to pay a maximum of 3%, and Rocket Mortgage will cover an additional 2% of the client’s purchase price as a down payment, or $2,000. Maximum grant amount is $7,000. Offer valid on primary residence, conventional loan products only. Maximum loan amount of $350,000. Cost of mortgage insurance premium passed through to client effective January 2, 2024. Offer valid only for home buyers when qualifying income is less than or equal to 80% area median income based on county where property is located. Not available with any other discounts or promotions and cannot be retroactively applied to previously closed loans or loans that have a locked rate. This is not a commitment to lend. Rocket Mortgage reserves the right to cancel/modify this offer at any time. Additional restrictions/conditions may apply.

³ The 3% down payment option is only available on certain conventional loan products and is not available in all states. Additional terms and conditions may apply.

⁴ Client will receive a 1 point (1.000) loan level price adjustment (LLPA) credit on HomeReady and Home Possible purchase loans locked on or after January 2, 2024. One point (1.000) is equal to 1% of the loan amount. Minimum credit amount will be $2,000. Maximum loan amount is $350,000. Offer is not available with any other discounts or promotions. Offer cannot be retroactively applied to previously closed loans or loans already in process; offer is not transferable. Rocket Mortgage reserves the right to cancel/modify this offer at any time. Additional restrictions/conditions may apply. This is not a commitment to lend.