If you’re a first-time home buyer browsing homes on the market, you might be wondering how to calculate your home buying budget. Lenders take many factors into consideration when considering the size of mortgage you can afford, including your household income, the amount of your down payment, and your total debt.

How your debt-to-income ratio determines your home buying budget

While setting a home buying budget, it is important to consider your debt-to-income (DTI) ratio: the amount of total debt you owe compared to your income. DTI ratio is one of the main factors mortgage lenders take into consideration. Generally, lenders prefer this total does not exceed 36 percent, with 28 percent of that total going towards servicing your mortgage. However, this ratio is just a guideline, and the amount of credit for which you are approved can result in a DTI ratio higher or lower than 36 percent, as it is based on your personal credit situation.

Calculate DTI by dividing your monthly mortgage payment by your monthly pre-tax income. For example, if your mortgage payment (including taxes and insurance) on a 30-year mortgage would be $1,260, and you have a monthly income of $4,500, your DTI ratio is 0.28 (28 percent). This calculation shows that a monthly payment of $1,260 is the maximum you should budget for on a $4,500 monthly income.* Once you add any other debt you have, such as student loans or auto loans, DTI should not exceed 36 percent. However, some lenders accept debt-to-income ratios up to 43 percent depending on the borrower’s financial situation.

setting a home buying budget

*Numbers used in this example are for illustrative purposes only. Head over to our financial calculators to calculate your personal debt-to-income ratio.

How a down payment impacts your home buying budget

The more money you put down on your new home, the less you need to finance; therefore, the higher your down payment, the more home you will be able to afford. A higher down payment may also mean lower monthly payments or a shorter repayment timeline.

If you want to buy a home but you do not have the funds for a down payment, it is important to keep in mind a down payment is not always required in order to buy a home. Depending on your situation, even if you do not have the funds for a down payment, it may be better for you to buy a home and begin building equity rather than continuing to pay rent.

Other factors to consider in your home buying budget

If you’re a first-time home buyer, you should be aware of any fees that come with buying and closing on a home so there are not surprises to your budget. Here are a few additional expenses to keep in mind:

  • Homeowners Association (HOA) fees, which may be paid monthly or annually, if they apply to the neighborhood(s) you’re considering
  • Home repairs upon move-in
  • Private mortgage insurance (PMI), which is usually required if your down payment is less than 20 percent
  • Homeowners insurance
  • Appraisal, inspection(s), attorney, and other closing fees, all of which are common during the home buying process

Buying a home for the first time can seem like a daunting process with all the financial requirements, mortgage options, and homes to choose from. To help you through the process, we’ve compiled advice from our experienced mortgage lenders in a complete first-time home buyers guide. Download it for free and let us guide you through the process step-by-step!

Next steps:

  1. Check out our financial calculators to determine your debt-to-income ratio and find out how much home you can afford.
  2. Learn more about our mortgage team and contact a lender if you have questions.
  3. Subscribe to our weekly e-newsletter.