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How Much Can You Afford

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Apr 28, 2023 #Afford

Whether you’re a first-time homebuyer or a seasoned real estate investor, buying a home involves a lot of paperwork and patience. And if you want to ensure you’re making the right financial decision, it’s also important to do the math before your heart is set on a particular house.

While your lender will tell you the maximum loan amount you qualify for, you should be taking a really close look at your budget to understand how much you can comfortably afford. Financial advisors have a few rules to follow, but it’s also up to you to understand your comfort level when taking on debt.

CNBC Select spoke with Mark Reyes, CFP and Albert financial advice expert, about the two rules you should follow when taking out a mortgage — and when it might be OK to break them.

The annual salary rule

Ally Bank Mortgage

  • Annual Percentage Rate (APR)

    Apply online for personalized rates; fixed-rate and adjustable-rate mortgages included

  • Types of loans

    Conventional loans, HomeReady loan and Jumbo loans

  • Terms

  • Credit needed

  • Minimum down payment

    3% if moving forward with a HomeReady loan

Better.com Mortgage

  • Annual Percentage Rate (APR)

    Apply online for personalized rates; fixed-rate and adjustable-rate mortgages included

  • Types of loans

    Conventional loan, FHA loan, Jumbo loan and adjustable-rate mortgage (ARM)

  • Terms

  • Credit needed

  • Minimum down payment

    3.5% if moving forward with an FHA loan

That said, the pre-approval letter shouldn’t be your only source of guidance. There are other essential factors you should consider when calculating how much house you could afford, such as your salary. And according to Reyes, the ideal mortgage size should be no more than three times your annual salary.

Using the annual salary rule

If you make $60,000 per year, you should think twice before taking out a mortgage that’s more than $180,000. However, if you have a partner, and your combined income is $120,000, you can comfortably increase your loan amount to $360,000.

That’s not to say you should always opt for the most expensive mortgage you can qualify for. If you settle on something below your max, you’ll have more wiggle room to put money into a high-yield savings account or pay for other costs like home renovations.

The monthly income rule

These rules might not apply depending on where you live

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Make yourself a competitive buyer

CreditWise® from Capital One

Information about CreditWise has been collected independently by Select and has not been reviewed or provided by Capital One prior to publication.

  • Cost

  • Credit bureaus monitored

  • Credit scoring model used

  • Dark web scan

  • Identity insurance

PrivacyGuard™, one of CNBC Select’s top choices for best credit monitoring services, offers well-rounded coverage, including alerts from all three credit bureaus whenever there’s new information as well as monthly credit score and report updates, depending on the plan you choose.

PrivacyGuard®

Information about PrivacyGuard® plans has been collected independently by Select and has not been reviewed or provided by the Privacy Guard prior to publication.

  • Cost

    $9.99 to $24.99 per month

  • Credit bureaus monitored

    Experian, Equifax and TransUnion

  • Credit scoring model used

  • Dark web scan

    Yes, for Identity and Total Protection plans

  • Identity insurance

    Yes, up to $1 million for Identity and Total Protection plans

Bottom line

Editorial Note: Opinions, analyses, reviews or recommendations expressed in this article are those of the Select editorial staff’s alone, and have not been reviewed, approved or otherwise endorsed by any third party.


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