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Credit scores can affect both your ability to get a loan and the interest rate you pay. People with scores of 740 or higher pay 0.5% to 1.0% less in interest than people with scores of 620 or lower. This means that they would save $200 to $400 a month on a $450,000 mortgage.
Where you live has a big impact on how much money you can spend. In places with average prices, a salary of $150,000 can buy a three-bedroom home. In expensive cities like San Francisco or New York, it can only buy a two-bedroom condo.
People with credit scores of 580 or higher only need to put down 3.5% for a Federal Housing Administration loan. For a conventional loan, first-time home buyers can put down as little as 3% of the purchase price. This helps people who don't have a lot of money save up to buy a home.
Your monthly housing costs include the principal, interest, property taxes, homeowners insurance, HOA fees, and PMI. These costs can add anywhere from $600 to $1,200 to what you already owe in principal and interest.
If you make $150,000 a year, you are in a good position to buy a home. However, to know exactly how much house you can afford, you need to look at all of your finances, not just your salary. I've spent years helping families figure out these numbers, and I can tell you that knowing the numbers before you start shopping can make the difference between a stress-free and a stressful home purchase.
Take a deep breath. At first, figuring out your home budget might seem like a lot of work, but if you break it down into simple, doable steps, it will be easier to handle. The Bureau of Labor Statistics says that $150,000 is almost 2.5 times the median household income in the US. This means that you are starting off with a lot of money. But your real buying power depends on things like how much debt you already have, how much you have saved for a down payment, your credit score, and the current interest rate environment.
We'll talk about the standard affordability calculations that lenders use, how your personal finances affect your budget, the different types of loans you can get, and useful tips for getting the most out of your buying power. This guide will help you buy a home with confidence and clarity, whether it's your first time or you're moving up to a bigger one.
The 28/36 rule is what most people use to figure out how much a house is worth. If you know this rule, you can set realistic goals before you start looking for a house. This rule says that all of your monthly debt payments, including your rent or mortgage, shouldn't be more than 36% of your gross income. Your monthly housing costs shouldn't be more than 28% of your gross income. These numbers aren't just made up; they come from decades of lending data that show how much debt homeowners can handle without losing their financial stability.
This is how it works out if you make $150,000 a year. Your gross monthly income is $12,500 before taxes and other deductions. The 28% rule says that if you have a mortgage, interest, property taxes, homeowners insurance, and HOA fees, you shouldn't spend more than $3,500 a month on them. If your total debt limit is 36%, it means that your monthly payments, including your rent, car payments, student loans, credit cards, and other bills, should not be more than $4,500.
The Consumer Financial Protection Bureau says that research shows that families who spend more than 28–30% of their income on housing are much more likely to have money problems, miss payments, and lose their homes. The 36% back-end ratio makes sure you don't get too far into debt by making sure you have enough money coming in to cover your savings, emergencies, and daily costs.
This is how it works in real life. If you have $1,000 in monthly debt payments, like a $400 car payment, $300 in student loans, and $300 in credit card payments, you could afford up to $3,500 in housing costs while still staying below the 36% threshold. The total debt is $4,500, which is 36% of the $12,500 income. But if you already owe $2,000 a month, your maximum housing payment goes down to $2,500 to keep your total debt ratio at 36%.
Some lenders are more likely to break this rule if you have good credit, a lot of savings, or not a lot of debt in general. The Federal Housing Administration often lets people have debt-to-income ratios of up to 43%. Some traditional lenders will go even higher, up to 45% or even 50% for borrowers who are very well qualified. The National Association of REALTORS® says that about 25% of home buyers pay more than the usual 28% of their income for housing. This is especially true for first-time buyers in expensive markets who think their income will go up.
Many people don't realize until they sit down with a calculator that their current debts affect how much house they can afford just as much as their income. Two people who make the same amount of money, $150,000, can have very different home budgets just because of how much they pay in debt each month. Knowing how this relationship works will help you plan how to pay off your debt before you apply for a mortgage.
Let's look at two real-life examples to see how this works. Borrower A makes $150,000 a year and has very little debt. They only have to pay $250 a month for their car and $100 a month for their credit cards, which adds up to $350 a month. Borrower B makes the same amount of money, $150,000, but has $1,500 in monthly bills: a $550 car payment, $400 in student loans, $250 in credit card debt, and a $300 personal loan payment. The 36% rule says that Borrower A can afford $4,150 in monthly housing costs ($4,500 total debt limit minus $350 existing debt), but Borrower B can only afford $3,000 in monthly housing costs ($4,500 minus $1,500).
If you assume a 7% interest rate and a normal down payment, that $1,150 difference in monthly payment capacity means a home price difference of about $200,000 to $250,000. With a 10% down payment, Borrower A could buy a home worth $575,000, but Borrower B could only afford a home worth $425,000. This means that there is a 35% difference in buying power that comes only from existing debt levels, not income.
The kind of debt is also important, especially for lenders. Fannie Mae says that installment loans, like car payments and student loans, are based on the actual monthly payment. The minimum payment or 5% of the balance, whichever is higher, is used for credit card debt. If you have a $10,000 credit card balance and a $200 minimum payment, that counts as $200 in your debt-to-income calculation. But if your balance goes up to $15,000 with a $225 minimum payment, lenders may use $750 a month (5% of the balance) if that's more than your actual minimum payment.
If you want to buy a house in the next 6 to 12 months, the best thing you can do right now is to pay off or pay down smaller debts first. If you get rid of a $250 monthly car payment or a $300 monthly personal loan, you can afford to pay that much more for your housing. Some of my coworkers who work on mortgage technology projects have noticed that some borrowers pay off small debts right before applying for a loan. This can help them get $30,000 to $50,000 more in home price with just $3,000 to $5,000 in debt paid off.
Your down payment serves as more than just the initial investment in your home—it fundamentally changes your monthly payment, interest rate, and total borrowing costs. Understanding these impacts helps you make strategic decisions about how much to put down versus keeping money in savings or investments.
Here's a concrete comparison using a $450,000 home purchase at a 7% interest rate. With a 3% down payment ($13,500), you're borrowing $436,500. Your monthly principal and interest payment would be approximately $2,905, plus you'd pay private mortgage insurance of roughly $291 monthly (0.8% annually on the loan amount), bringing your total to $3,196 before taxes and insurance. With a 10% down payment ($45,000), you're borrowing $405,000 with a monthly P&I payment of about $2,695 plus $203 PMI, totaling $2,898. With a 20% down payment ($90,000), you're borrowing $360,000 with a monthly P&I of $2,395 and no PMI requirement, saving $801 monthly compared to the 3% down scenario.
PMI typically costs 0.5-1.5% of the original loan amount annually, with the exact rate depending on your credit score, loan-to-value ratio, and loan type. Borrowers with 760+ credit scores putting 5% down might pay 0.6% annually, while those with 680 scores putting 3% down could face 1.2% annually. On a $450,000 loan, this difference ranges from $2,250-$5,400 annually, or $188-$450 monthly.
The good news about PMI is that it's not permanent. Federal law requires lenders to automatically cancel PMI when your loan balance reaches 78% of the original property value through regular monthly payments. You can also request cancellation at 80% loan-to-value, though lenders may require a new appraisal to verify your home hasn't lost value. Most borrowers reach this threshold within 8-12 years depending on their initial down payment and property appreciation.
Beyond PMI, your down payment affects your interest rate directly. Most lenders offer their best rates to borrowers putting 20% or more down, with rate premiums of 0.25-0.5% common for loans with lower down payments. Federal Reserve data shows that a 0.375% rate difference on a $400,000 loan costs approximately $90 monthly or $32,400 over 30 years. These pricing adjustments reflect the lender's increased risk with higher loan-to-value ratios.
Interest rates might seem like a small percentage, but they have an enormous impact on your monthly payment and total home cost. Even a single percentage point difference can change your affordable home price by tens of thousands of dollars, which is why rate shopping and timing your purchase strategically matter so much.
Let me show you exactly what I mean with real numbers. On a $450,000 mortgage at 6.5% interest, your monthly principal and interest payment would be $2,844. At 7.0%, that same loan costs $2,995 monthly—$151 more. At 7.5%, you're paying $3,146, or $302 more than at 6.5%. Over 30 years, the difference between 6.5% and 7.5% totals $108,720 in additional interest paid. Average 30-year fixed rates have fluctuated between 6.0-7.9% over the past 24 months, meaning borrowers who bought at different times experienced dramatically different costs.
Here's another way to think about this: if you're approved for a monthly payment of $3,500 for principal and interest, you can afford a $525,000 mortgage at 6.5%, $490,000 at 7.0%, or $458,000 at 7.5%. That's a $67,000 swing in borrowing power from just a 1 percentage point rate change. Your income hasn't changed, your debt hasn't changed, but your buying power shifted significantly based on the rate environment.
Several factors determine your specific mortgage rate beyond the general market level. Your credit score is the single biggest factor—borrowers with 760+ credit scores typically receive rates 0.75-1.5% lower than those with 620-639 scores. A $450,000 loan at 6.5% versus 7.5% means the difference between a $2,844 monthly payment and $3,146, or $302 monthly, $3,624 annually, and $108,720 over 30 years.
Your loan-to-value ratio affects rates too. Lenders charge 0.25-0.5% more for loans exceeding 80% LTV compared to those with 20%+ down payments. The loan type matters—15-year mortgages carry rates roughly 0.5-0.75% lower than 30-year loans, while adjustable-rate mortgages often start 0.5-1.0% below fixed rates. The Federal Reserve's monetary policy decisions drive these baseline rates, with the federal funds rate serving as the foundation that influences all consumer borrowing costs.
A $150,000 salary goes dramatically further in some housing markets than others, and understanding these differences helps you set realistic expectations or consider strategic relocation. The same income that affords a spacious single-family home in median-cost areas might only cover a modest condo in high-cost markets.
According to the National Association of REALTORS®, the median existing home price in the United States was $387,600 in late 2024. However, this national figure masks enormous regional variation. In the Midwest, the median home price was $289,900, while in the West it reached $548,600—nearly double. For someone earning $150,000, this means your income represents 1.9 times the typical Western home price but 5.2 times the Midwestern home price.
Here's what this looks like in specific markets. In Louisville, where I live, the median home price hovers around $280,000-$320,000, meaning a $150,000 salary comfortably affords a 3-4 bedroom single-family home with a yard. In Denver, the median approaches $580,000, pushing many $150,000 earners toward townhomes or smaller properties. In San Francisco, where the median exceeds $1.2 million, that same income might only afford a 1-2 bedroom condo even with a substantial down payment.
Property taxes create another layer of geographic variation. Effective property tax rates range from 0.31% in Hawaii to 2.13% in New Jersey. On a $450,000 home, this difference means $1,395 annually in Hawaii versus $9,585 in New Jersey—a gap of $8,190 yearly or $682 monthly. These taxes get incorporated into your monthly housing payment through escrow accounts, directly affecting your total affordability calculation.
Homeowners insurance costs vary significantly by region too. The Insurance Information Institute reports that average annual premiums range from $841 in Hawaii to $4,231 in Oklahoma. Weather risk, coastal location, and regional construction costs all influence these rates. A $450,000 home in Oklahoma might cost $353 monthly to insure versus just $70 in Hawaii, creating a $283 monthly difference that affects your overall budget.
What this means for you: if you're finding that $150,000 doesn't stretch as far as you expected in your target market, you have several strategic options. You might consider adjacent communities with lower prices, look at condos or townhomes instead of single-family homes, expand your job search to include remote opportunities that allow relocation to lower-cost areas, or adjust your timeline to save a larger down payment that increases your buying power in expensive markets.
The type of mortgage you choose significantly affects your buying power, minimum requirements, and long-term costs. Understanding your loan options helps you select the path that best fits your financial situation and homeownership goals.
Conventional conforming loans represent the most common mortgage type, accounting for roughly 65% of all home purchases. These loans follow Fannie Mae and Freddie Mac guidelines, requiring minimum 620 credit scores though most lenders prefer 640+. You can put as little as 3% down on a primary residence if you're a first-time home buyer using HomeReady or Home Possible programs, or 5% for other conventional loans. The baseline conforming loan limit for 2026 is $806,500 for most areas, with high-cost areas reaching $1,209,750.
FHA loans backed by the Federal Housing Administration offer an accessible path for borrowers with lower credit scores or smaller down payments. You can qualify with a 580 credit score and 3.5% down payment, or even 500 credit score with 10% down. FHA loans represented 13% of home purchase originations in 2024. The tradeoff is mortgage insurance that costs more than conventional PMI—1.75% upfront plus 0.55-0.85% annually that remains for the loan's life if you put down less than 10%.
VA loans guaranteed by the Department of Veterans Affairs serve active-duty service members, veterans, and eligible surviving spouses. These loans require no down payment and no monthly mortgage insurance, making them extremely cost-effective for qualified borrowers. VA loans do charge a funding fee of 2.15-3.3% that can be rolled into the loan amount. VA loans represented approximately 9% of home purchase originations in 2024.
USDA loans backed by the United States Department of Agriculture serve rural and suburban areas designated as eligible by USDA maps. These loans also require no down payment and charge guarantee fees lower than FHA's mortgage insurance. However, borrowers must meet income limits that vary by county—typically 115% of the area median income. Properties must be in designated rural areas, which according to USDA definitions include many suburban communities and small towns, not just farmland.
Jumbo loans exceed conforming loan limits and come with stricter requirements. Expect to need 680+ credit scores, 10-20% down payments, and debt-to-income ratios under 43%. Interest rates on jumbos typically run 0.25-0.5% higher than conforming loans. For someone earning $150,000 wanting to buy above conforming limits, saving a 20% down payment and maintaining excellent credit becomes especially important.
A lot of people only think about the mortgage payment when they figure out how much they can afford. But your total monthly housing costs include a lot of other costs that can add hundreds or even thousands of dollars to your budget. Knowing all of these costs ahead of time will help you avoid unpleasant surprises after closing.
PITI stands for Principal, Interest, Taxes, and Insurance, which are the four main parts of your mortgage payment. The principal is the amount you borrowed, and it goes down over time. Interest is the fee you pay to borrow money, and it is based on the amount you still owe. These first two parts are what most people think of when they think of their mortgage payment. If you borrowed $450,000 at 7% interest, your monthly payment for the principal and interest would be $2,995.
Tax Foundation data shows that property taxes vary widely by location, but they usually range from 1.0% to 1.5% of the home's value each year. If you buy a $500,000 home, you should expect to pay $5,000 to $7,500 a year or $417 to $625 a month. New Jersey and Illinois, for example, have high taxes and might double this amount. Hawaii and Alabama, on the other hand, have low taxes and might only get half. Local schools, police, fire departments, roads, and other city services get money from these taxes.
Depending on where you live, the risk of bad weather, and the level of coverage, homeowners insurance usually costs between 0.3% and 1.5% of the value of your home each year. The Insurance Information Institute says that the average national premium is about $1,428 a year, but this can range from $841 to $4,231 depending on the state. For a $500,000 home, insurance will cost between $150 and $400 a month. If your home is in a flood zone, you need extra flood insurance that costs between $400 and $2,000 a year. People who live in coastal areas that are likely to get hurricanes have to pay more for insurance. Sometimes they need separate windstorm coverage.
If you put less than 20% down on a conventional loan, you will need private mortgage insurance. As we talked about before, this costs between 0.5% and 1.5% of the loan amount each year. PMI adds $188 to $563 to a $450,000 loan each month, depending on your credit score and how much you put down. Keep in mind that this will end automatically at 78% loan-to-value through regular payments.
Condominiums, townhomes, and many planned communities all have to pay homeowners association fees. The Community Associations Institute says that average monthly fees are between $200 and $400, but they can be more than $1,000 in luxury buildings or communities with a lot of amenities. These fees pay for things like landscaping, maintenance on the outside of the building, pools and fitness centers, and money set aside for big repairs. Before you buy, always look over the HOA's finances and meeting notes.
Utilities and maintenance are costs that will continue after you pay off your mortgage. If you have a $500,000 home, you should set aside $5,000 to $10,000 a year for maintenance, or $417 to $833 a month. This includes fixing plumbing, servicing HVAC systems, maintaining the roof, replacing appliances, and other maintenance. Utilities like electricity, gas, water, sewer, and trash collection usually cost between $300 and $600 a month, depending on the size of the home, the climate, and the local rates.
Your credit score affects both whether you qualify for a mortgage and what interest rate you receive. The difference between a good score and an excellent score can save you $300-$500 monthly and $100,000+ over your loan's life, making credit optimization one of the highest-return financial moves you can make.
Here's exactly how credit scoring works for mortgage lending. Most lenders use FICO scores, which range from 300-850 and are calculated from your credit reports. The score breaks down as: 35% payment history, 30% amounts owed, 15% length of credit history, 10% new credit, and 10% credit mix. Lenders typically pull scores from all three credit bureaus—Experian, Equifax, and TransUnion—and use the middle score for qualification.
The rate tiers matter enormously to your actual costs. Borrowers typically see rate improvements at these credit score thresholds: 740+ receives the absolute best rates, 700-739 faces approximately 0.25% higher rates, 680-699 pays roughly 0.5% more, 660-679 sees about 0.75% higher rates, 640-659 faces 1.0-1.25% premiums, and 620-639 pays 1.5-2.0% above the best rates. On a $450,000 mortgage, the difference between a 740 score at 6.75% and a 640 score at 7.75% equals $320 monthly or $115,200 over 30 years.
Beyond interest rates, credit scores affect PMI costs significantly. Mortgage Insurance Companies of America rate cards show PMI premiums varying by 0.3-1.0 percentage points based solely on credit score at the same loan-to-value ratio. A borrower with 760+ credit at 95% LTV might pay 0.6% annually in PMI, while a borrower with 640 credit at the same LTV could face 1.4% annually—$2,700 versus $6,300 yearly on a $450,000 loan, or $225 versus $525 monthly.
Here's what you can do to optimize your credit before applying for a mortgage. Pay down credit card balances below 30% of limits—utilization above 30% significantly hurts scores, with the best scores typically showing under 10% utilization. Dispute any errors on your credit reports by obtaining free annual reports from AnnualCreditReport.com and filing disputes directly with bureaus for any inaccurate information. 20% of consumers have errors on at least one report. Avoid applying for new credit within 6 months of your mortgage application since each hard inquiry temporarily drops scores by 3-5 points. Make all payments on time for at least 12 months before applying—payment history is the single largest scoring factor. Consider becoming an authorized user on a family member's credit card with perfect payment history and low utilization, which can add that positive history to your report.
You can't just multiply your income by a simple number to find out how much house you can afford on a $150,000 salary. You need to look at all of your finances. Your current debt, how much money you have saved for a down payment, your credit score, and the interest rate you qualify for all have a big effect on how much you can buy. Someone who makes $150,000 a year, has little debt, and good credit might be able to buy a $575,000 home. But someone who makes the same amount of money but has $2,000 in monthly debt and average credit might only be able to buy a $425,000 home.
The 28/36 rule is a good place to start. You shouldn't spend more than 28% of your gross monthly income on housing costs, and your total debt shouldn't be more than 36%. If you make $150,000 a year, you can afford $3,500 a month for housing and $4,500 for all of your debts. But if you have a good credit score, a lot of money saved up, or not much debt overall, you might be able to break these rules a little. More and more, lenders are looking at full financial profiles instead of strict ratio cutoffs.
Where you live has a big effect on what you can buy with your money. In cities with high prices, that $150,000 salary might only be enough to buy a small condo, but in markets with average prices, it can buy a big single-family home with a yard. Being aware of these differences between areas, as well as the differences in property taxes and insurance rates, can help you set realistic goals or choose the best location for your business.
The type of loan you take out will affect both the minimum amount you need and the total cost. People with good credit and enough money for a down payment can get the best long-term rates with conventional loans. It's easier to get an FHA loan if you have a lower credit score and a smaller down payment, but the mortgage insurance is more expensive. VA and USDA loans let people who qualify buy a home without having to put any money down. If you know about these other choices, you'll be able to choose the one that works best for you instead of just going with what your first lender says.
Do something about the things you can control right now. If you want to buy in 6 to 12 months, work on raising your credit score. A score of 680 instead of 740 can save you $200 to $300 a month and $72,000 to $108,000 over 30 years. Pay off or pay down smaller debts to lower your debt-to-income ratio and give yourself more room to make payments. If you can, save a lot for your down payment—10% to 20% is a good goal—to lower your PMI costs and get better interest rates. These smart things you do before you start looking for a house can help you save $50,000 to $100,000.
A $500,000 home might be affordable on a $150,000 salary, but it depends on the rest of your finances. If you put down 20% ($100,000), you would be borrowing $400,000. If you paid 7% interest, your monthly payment for both the principal and interest would be about $2,661. Your total housing cost would be between $3,311 and $3,486 a month if you added $500 to $625 a month in property taxes (assuming 1.2 to 1.5% a year), $150 to $200 a month in homeowners insurance, and no PMI because you put down 20%. This is 26–28% of your $12,500 gross monthly income, which is well within the 28% housing cost guideline. But to stay below the 36% total debt limit, you would need to have very little debt already—no more than $1,000 to $1,200 in other monthly bills. The National Association of REALTORS® says that this situation works for about 40% of people who make $150,000 a year and have done a good job of managing their debt and saving up a large down payment. If you don't have $100,000 saved, you could still buy a $500,000 home with 10% down ($50,000), but you'd have to pay PMI of about $210 a month, which would make your total housing cost $3,521-$3,696 and mean you need to be even more careful with your debt. Your current debt levels, the amount of your down payment, your credit score (which affects your interest rate), and how comfortable you are with housing costs compared to other financial priorities like saving for retirement and having an emergency fund are all important factors.
If you want to buy a $450,000 home, you should have between $27,000 and $99,000 saved up, depending on how much you want to put down and how much of a financial cushion you want to build. You will need at least your down payment, closing costs, and reserves. A 3% down payment is $13,500, and closing costs are usually between 2% and 5% of the purchase price ($9,000 to $22,500). You should also have an emergency fund that covers 3 to 6 months of expenses ($15,000 to $30,000 if you live on $5,000 a month). This makes the minimum between $37,500 and $66,000. But this minimum means that you will have no savings left after closing, which our mortgage technology platform colleagues think is risky for buyers. A more reasonable goal is $88,500, which includes 10% down ($45,000), 3% closing costs ($13,500), and 6 months' worth of reserves ($30,000). This gives you enough room to deal with unexpected repairs or income problems. The Federal Reserve Survey of Consumer Finances says that the average amount of money saved by families with incomes between $100,000 and $149,999 is about $52,000. For families with incomes between $150,000 and $199,999, the average amount saved is $82,000. If you're below these levels, you might want to wait to buy a home until you have more money saved up or look for a less expensive one. Keep in mind that having extra money beyond your down payment and closing costs can help you get better interest rates. Fannie Mae says that borrowers with 6–12 months of reserves usually get better prices than those with little savings. For a $400,000 loan, this means $40–$80 in monthly savings and $14,400–$28,800 over 30 years.
Instead of maxing out your budget, leave some room in your payment capacity. This will give you more options if your life changes and keep you from becoming house-poor. Just because lenders say you can borrow a certain amount doesn't mean you should spend it all. The Consumer Financial Protection Bureau found that borrowers who use less than 80% of their maximum approved loan amount are much happier with their finances and have lower stress levels. This is important because if you can afford a $4,500 monthly payment based on the 36% rule, you might want to aim for $3,600 to $4,000 instead, leaving $500 to $900 a month for unexpected costs, higher utility bills, maintenance, or future debt. Things happen in life that can change your income, like needing medical care you didn't expect, wanting to buy a new car, or having to change jobs. When these things happen, having a built-in buffer keeps you from getting stressed about money. I've seen families who spent all their money on home repairs or realized their furniture budget wasn't big enough have a hard time when they have to make their first big repair. The National Association of Home Builders says that new homeowners spend an average of $13,000 to $18,000 on furniture, repairs, and improvements in the first year that they didn't plan for. Also, the first home you buy probably won't be your last. If you spend the most money you can on a home, you might not be able to afford to move up when your family grows or your situation changes. Data from the National Association of REALTORS® shows that first-time home buyers usually stay in their first home for 6 to 10 years. If you keep your budget flexible, you'll be able to make the switch when the time comes. Finally, buying below your maximum gives you room to save for retirement, college, travel, and other financial goals besides owning a home. A house is important, but you shouldn't spend all of your money on it.
Student loans make it harder for you to buy a home because they raise your debt-to-income ratio and lower the amount of money you can afford to pay each month for housing. When lenders figure out your 36% DTI threshold, they include your student loan payment in your total monthly debt obligations. The Department of Education says that borrowers who make $150,000 a year usually have student loan balances between $45,000 and $75,000. This means that on standard 10-year repayment plans, they pay between $450 and $750 a month. If you have an income-driven repayment plan, lenders usually use either your actual monthly payment or 1% of your outstanding balance, whichever is higher. If you have $60,000 in loans on an IDR plan and pay $300 a month, most lenders would use $600 a month in DTI calculations, even though you're only paying $300. This can make it much harder for you to buy things. Let's look at some numbers: a person who makes $150,000 a year could afford up to $4,500 a month in total debt without student loans. If you have to pay back $500 in student loans, your maximum housing payment goes down to $4,000. If you have to pay back a $1,000 student loan, you can only afford $3,500 for housing. Every $100 you owe in student loans each month lowers the price of your home by about $17,000 to $20,000, depending on the interest rate. Even with student loans, there are some smart ways to get the most out of your money. If you're on an IDR plan, getting your servicer to send you proof of your $300 payment might let lenders use that instead of the 1% calculation. Paying off your debt before applying helps. For example, getting rid of $5,000 in loans might only save you $50 a month, but it will lower your DTI. Some lenders will not count a loan against your DTI if you can show that you will pay it off in less than ten months. Fannie Mae says that if you can show proof, you can leave out loans with 10 or fewer payments left.
The best plan for you will depend on the interest rates, amounts, and effects on your credit of your debts, but in general, paying off high-interest debt first is better for your finances. To make this choice, start by paying off any debt with interest rates higher than 6–7%. This is because you'll get a guaranteed return equal to the interest rate you're getting rid of. If you have credit card debt of 18–24%, it's a lot better than putting your money in a savings account that only earns 4–5%. The Federal Reserve says that the average credit card rate was 22.75% in late 2024. If you pay off a $5,000 credit card balance at 22%, you will save $1,100 a year in interest. This adds up to a lot of money over time. Experian research shows that paying off credit cards can also improve your credit utilization ratio, which could raise your credit score by 30 to 60 points. If your score goes up, your mortgage rate could go down by 0.25% to 0.5%. This would save you $100 to $200 a month and $36,000 to $72,000 over 30 years on a $450,000 loan. If you have low-interest loans, though, you should save for your down payment first. Getting a car loan or student loan with a 3–4% interest rate is cheaper than paying PMI with a bigger down payment. If you go from 5% down to 10% down, you'll save about $100 a month on PMI. Your 3.5% car loan might only cost $60 a month to keep up. A balanced approach usually works best. Set up an emergency fund of $5,000 to $10,000, then use 60% to 70% of your extra savings to make a down payment and 30% to 40% to pay off debt. This lets you stay flexible with your money while making progress on both fronts. The National Association of REALTORS® says that most first-time buyers took 3 to 5 years to save for a down payment and pay off debt before buying.
Prequalification and preapproval are two different levels of lender commitment and verification. Preapproval is much more important in competitive home markets. Prequalification is an informal, early look at your finances based on what you tell a lender about your income, debts, assets, and credit. The lender doesn't check any of this information and usually doesn't look at your credit report. The Consumer Financial Protection Bureau says that prequalification usually takes 30 to 60 minutes and gives you a rough idea of what you might be able to afford. But it doesn't bind the lender, and sellers don't care much about it because the information hasn't been checked. A formal application, paperwork submission, credit check, and review by an underwriter are all part of preapproval. You'll need to give recent pay stubs, W-2s or tax returns, bank statements, and other financial papers. The lender checks your job and income, gets your credit report from all three bureaus, and an underwriter looks over your whole file to give you conditional approval with a specific loan amount, rate, and terms. 68% of sellers would rather get offers from preapproved buyers than prequalified buyers. In competitive markets, preapproval is almost always necessary. Usually, the preapproval process takes 3 to 10 days and leads to a commitment letter that is good for 60 to 90 days. When making offers, the key differences are very important. A preapproval letter shows sellers that you are a serious, qualified buyer whose financing is unlikely to fall through. A prequalification letter means you're still in the early stages of the process and might not qualify. A lot of my coworkers who work on our digital lending platform suggest this timing strategy: get prequalified 6 to 12 months before you plan to buy so you know how much money you can spend, and then get preapproved when you're ready to start looking for a house. This order cuts down on hard credit checks while giving you accurate budget information early on.
An adjustable-rate mortgage can help you buy a bigger house at first because the rates are lower at the beginning. However, you need to carefully think about your plans, how much risk you can handle, and the current rate environment. ARMs usually have initial rates that are 0.5% to 1.0% lower than those of similar fixed-rate mortgages. This means that during the first fixed period, you could save $200 to $400 a month on a $450,000 loan. The first number in common ARM structures like 5/1, 7/1, and 10/1 shows how many years the rates will stay the same before they start to change every year. Freddie Mac's historical data shows that ARMs made up only 6-8% of mortgage originations in 2023-2024, when fixed rates were high. In 2020-2021, when fixed rates were at record lows, ARMs made up 25-35% of originations. ARMs are a good idea in some situations. If you're sure you'll sell or refinance within the fixed period, you can get the lower rate without having to worry about the risk of an adjustment. This includes military families who are expecting to move, professionals who are planning to move, and buyers who are temporarily stretching their budgets until their expected income rises. If you're buying in a high-rate environment and expect rates to go down, starting with an ARM lets you take advantage of falling rates through adjustments instead of having to refinance. But you need to fully understand the big risks that come with ARMs. After the first fixed period, your rate changes every year based on an index and a margin. The Consumer Financial Protection Bureau says that most ARMs can only go up by 2% each year and 5–6% over the life of the loan. If indices go up a lot, rates could go as high as 11.5% to 12.5% on a $450,000 loan that starts at 6.5%. However, periodic caps keep rates from going up too quickly. Before you choose an ARM, figure out if you can afford the highest payment allowed under the lifetime cap. If a $450,000 ARM at 6.5% costs $2,844 a month but could go up to 12.5%, you need to be able to pay $4,701 a month in the worst case. Many people who borrow money only think about the low initial rate and don't think about the risk of it going up.
You are ready to buy if you can answer these important questions with a yes: Are you going to live in the area for at least five to seven years? Can you easily afford the monthly payment and 1–2% of the home's value each year for maintenance? Do you have enough money saved up for a down payment and six months' worth of living costs? Is your job steady and does it pay enough to keep you safe? The National Association of REALTORS® says that it usually takes 5 to 7 years for the costs of closing, maintenance, and the opportunity cost of your down payment to make buying a home financially equal to renting one. Renting is better for shorter periods of time because you won't build much equity and will have to pay a lot of transaction costs twice. The full readiness assessment looks at more than just money. You should be emotionally ready to take on the responsibilities of owning a home, like making repairs and keeping it up, as well as the loss of freedom that comes with renting. Homeowners spend 10 to 15 hours a month fixing, maintaining, and improving their homes. However, renters only spend one to two hours a month on these things. Some people enjoy having this power and control, but others find it stressful and time-consuming. Your stage of life matters—buying makes more sense when your job, family size, and where you live are all pretty stable. Find out how much your current rent is compared to the estimated costs of owning a home. Find out how much you spend on housing each month, including the mortgage, taxes, insurance, upkeep, and HOA fees. If it costs 30–50% more to own a home than to rent one that is similar, renting might be the better choice for you. The Zillow rental vs. buy analysis shows that the buy vs. rent calculation is very different in different cities. For instance, owning a home is much better in cheap places like Pittsburgh or Memphis, but renting is better in expensive places like San Francisco or Manhattan. Finally, think about the other things you want to do with your money. If you have to pay off $40,000 in student loans, save for a wedding, or start a business, you might not be able to buy a house. Owning a home should be a part of your overall financial plan, not the main part.
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