To calculate how much house you can afford, we take into consideration your household income, monthly debts, and the amount of available savings for a down payment. Your goal is to have a mortgage payment that doesn’t severely reduce your quality of living or compromise your ability to meet unexpected expenses. A good affordability rule of thumb is to have three months of payments, including your housing payment and other monthly debts, in reserve.

Applying the 28%/36% rule, can help you determine the appropriate range for your mortgage payment. The premise of this rule is that you should not spend more than 28% of your gross monthly income on home-related costs and 36% on total debts, including your mortgage, credit cards and other loans like auto and student loans.

Example: If you earn $5,500 a month and have $500 in existing debt payments, your monthly mortgage payment for your house shouldn’t exceed $1,480.

Private mortgage insurance protects the lender—not you—if you stop making payments on your loan. PMI is typically required if you make a down payment of less than 20%, which can be up to 2% of the loan amount annually. There can be an upfront amount paid, as well as premiums due each month, lumped in with your loan payment until the remaining principal balance on the mortgage dips below 80% of the home’s value. Your lender may automatically cancel mortgage insurance charges when you owe 78% of the principal or less, but until then, this is an extra cost to factor into your monthly budget.

If you get a loan backed by the Federal Housing Administration, mortgage insurance premiums are likely to be due monthly for the life of the loan.

Getting pre-approved for a mortgage is the first step in your search for a home. You must meet with a lender (like us) to obtain a pre-approval letter before realtors and home sellers consider you to be a serious buyer.

Pre-approval involves filling out a mortgage application and providing your Social Security number so that a lender can do a hard credit check. A hard credit check is triggered when you apply for a mortgage. For this process, a lender pulls your credit report and credit score to assess your creditworthiness before deciding to lend you money. You’ll also need to provide extensive documentation of job history, assets and liabilities, income tax returns, and more. Self-employed buyers may need to provide additional documentation.

After reviewing your application, a lender will offer pre-approval or pre-approval with conditions, or deny pre-approval. Pre-approval is typically valid for 60 to 90 days.

We suggest seeking pre-approval six months to one year in advance of a serious home search so you will be in a stronger position to improve your overall credit profile, if necessary.