Before you start browsing Zillow, it's important to understand how much home you can realistically afford. The answer depends on more than just your income — it involves your debts, your down payment, and the hidden costs of homeownership that many buyers overlook.
Understanding Debt-to-Income Ratio (DTI)
Your debt-to-income ratio is the single most important number in determining your mortgage affordability. It compares your total monthly debt payments to your gross monthly income.
How to calculate your DTI:
- Add up all monthly debt payments: car loans, student loans, credit card minimums, personal loans, child support, etc.
- Add your estimated monthly mortgage payment (principal, interest, taxes, insurance, and HOA if applicable)
- Divide the total by your gross monthly income (before taxes)
Example:
- Gross monthly income: ,000
- Current monthly debts: (car payment + student loans)
- Estimated mortgage payment: ,800
- Total monthly obligations: ,300
- DTI: ,300 / ,000 = 38.3%
General DTI guidelines:
- FHA loans: Up to 43-50% DTI
- Conventional loans: Up to 45-50% DTI
- VA loans: No strict DTI cap, but 41% is a guideline
- Ideal DTI: 36% or below for the best rates and terms
Budgeting for Your Monthly Mortgage Payment
Your monthly payment is more than just principal and interest. Here's what's included in your total payment (often called PITI):
- Principal: The portion that pays down your loan balance
- Interest: The cost of borrowing
- Property taxes: Texas has no state income tax, but property tax rates are among the highest in the nation — averaging 1.6-2.2% of your home's assessed value annually
- Homeowner's insurance: Typically ,500-,500/year in Texas, depending on location and coverage
- Mortgage insurance: FHA MIP or conventional PMI if your down payment is less than 20%
- HOA fees: If applicable, these can range from to +/month
Hidden Costs Most Buyers Forget
Beyond your monthly payment, budget for these often-overlooked expenses:
- Closing costs: Typically 2-5% of the purchase price (,000-,000 on a ,000 home)
- Home inspection: -
- Appraisal fee: -
- Moving costs: ,000-,000 depending on distance
- Immediate repairs/updates: Budget at least ,000-,000 for the unexpected
- Furniture and appliances: New homes often need more than you expect
- Maintenance reserve: Plan to save 1% of your home's value annually for upkeep
A Quick Affordability Estimate
Here's a simplified way to estimate your price range:
Conservative approach: Your home price should be no more than 3-4x your annual gross income.
- Income: ,000/year → Target price: ,000-,000
Payment-based approach: Your total housing payment (PITI + HOA) should be no more than 28-31% of your gross monthly income.
- Gross monthly income: ,250 → Max payment: ,750-,940/month
These are starting points — your loan officer can give you a precise number based on your full financial picture.
Pre-Qualification vs. Pre-Approval
These terms are often used interchangeably, but they're different:
Pre-qualification:
- Quick, informal estimate based on self-reported financial info
- Gives you a ballpark of what you might qualify for
- Usually done in minutes, often online or over the phone
- No hard credit pull required
Pre-approval:
- Formal process that includes a credit check and document review
- Provides a specific loan amount you're approved for
- Carries much more weight with sellers
- Typically valid for 60-90 days
For the strongest position as a buyer, get pre-approved before you start making offers.
The Bottom Line
Knowing your budget before you start shopping saves time, prevents heartbreak, and puts you in the strongest position as a buyer. The best way to get a clear picture? Talk to a loan officer who can run your numbers through actual loan programs and give you a real answer — not just an estimate.
Ready to find out your home buying power? Contact me for a free, no-obligation pre-qualification.