You’ve been scrolling real estate listings, saving your favorites, and wondering what life might be like in a place that you own. While you are daydreaming about a bigger kitchen, a backyard, or a shorter commute to work, you’ll inevitably ask yourself, “How much can I actually afford?” It's an important question, because missing your mortgage payments can have serious consequences. A single missed payment typically results in a late fee and a hit to your credit score. With consecutive non-payments, your lender may begin the foreclosure process. Planning and preparation are key to avoiding this financial mess.
Here's the good news: Figuring out what you can afford doesn't have to be overwhelming. In this guide, you'll learn how to assess your finances, understand key mortgage terms, and estimate a comfortable monthly payment. You'll also discover how Alliant Journey Home can help you finance, find a home, and move in, while earning up to $9,000 back at closing.*
The first step to assessing how much mortgage you can afford is understanding your current financial health by determining your available budget.
That begins with calculating your monthly net income, the total amount of money you bring in after taxes and deductions. For every source of household income, review the past year's pay statements and average them out by month. If the monthly pay fluctuates, add up all your household's deposits and then divide the sum by 12.
Next, calculate your monthly expenses. First, write out a comprehensive list of every fixed cost, such as utilities, car payment and subscriptions. Then, estimate your variable costs, such as groceries, clothing, haircuts and entertainment. Add these figures together and subtract the sum from your monthly net income. The remainder is how much you have left for a mortgage.
Bear in mind the importance of having a realistic understanding of your financial picture, as spending your entire remainder on a mortgage payment every month wouldn't be prudent. The current rule of thumb is you shouldn't spend more than 28% of your monthly income on the mortgage, so calculate that percentage of your monthly earnings and set aside what remains for added security. Another good idea is to save up at least six months' worth of income so you have a cash reserve to lean on in case of financial disruptions or emergencies.
Debt-to-income ratio is a metric that describes what percentage of your income goes toward debt payments. Here, "debt" refers to practically any monthly recurring expense — not just loan repayments but also rent, credit card bills, and child support (utilities, groceries, gasoline, and taxes typically don't count toward your debt). A home lender will use this metric to assess your ability to satisfy your mortgage obligation.
Calculating your debt-to-income ratio involves adding up all your monthly debts and dividing them by your gross monthly income, or the amount you earn before taxes and deductions. Say that you earn $5,000 per month gross and have debts of $150 for your car loan, $200 for your student loans, and roughly $1,000 minimum payment for credit cards. The sum of your monthly debts would be $1,350, which, divided by $5,000, amounts to a debt-to-income ratio of 27%.
When it comes to mortgages, the highest debt-to-income ratio that many lenders are willing to tolerate is 43%. However, most lenders prefer a lower ratio of below 36%. If you're not sure where you stand, an Alliant mortgage loan officer can walk you through the numbers as part of a fast online prequalification—with no application fee.
The more money you put down on your home purchase, the lower your monthly mortgage payment. The reason isn't only that you'd be borrowing less money but also that lenders tend to offer lower mortgage rates in return for higher down payments.
While the old 20% home downpayment rule still makes the rounds, that amount isn't always required. You'll need to put down at least 3% of the home's total value to qualify for many mortgages, and some programs allow even less. Depending on your loan type and eligibility, you may find low- or no-down-payment options. Please note that your credit profile may influence the minimum amount you need to pay upfront to qualify. For borrowers with poor to fair credit scores, lenders generally require a minimum payment of 10% to minimize their risk. Private mortgage insurance (PMI) is a policy required by lenders on conventional loans when a borrower’s down payment is less than 20%. While it protects the lender if you default on payments, it typically costs $30 to $70 per month for every $100,000 borrowed, adding to your monthly mortgage payment.
The Alliant Advantage Mortgage (AAM) program allows first-time homebuyers to put down 0 percent with no PMI payments. The same program also enables non-first-time homebuyers to buy a new home with 5 percent down with no PMI.
If you need some help saving up for a suitable down payment, consider these tips:
Here's another way to stretch your budget: the cash back you can earn through Alliant's Journey Home℠ program—up to $9,000 at closing—can help offset upfront costs and give your savings a little more breathing room.
Every mortgage payment covers both the principal and the interest, so the interest rate your lender offers will significantly impact how much you owe monthly. One key factor that influences the interest rate you receive is the loan term, meaning the length of your mortgage.
The two most common loan terms are 15 years and 30 years, and each comes with its own set of pros and cons:
Loan term is only one part of the equation, though. Buyers may also choose between a fixed-rate mortgage and an adjustable-rate mortgage (ARM). A fixed-rate loan keeps your principal and interest payment the same over the life of the loan, while an ARM may start with a lower initial rate that can adjust later. Depending on how long you plan to stay in the home and your comfort with future payment changes, one option may fit better than the other.
Having a higher credit score and comparing offers from multiple lenders can help you lock in a more favorable rate.
The simplest solution to determining how much mortgage you can afford is to use a mortgage affordability calculator. To use one, all you must do is input data such as your income, debt value, your maximum down payment, and possibly the location of your housing market. The calculator will then do the math for you and present you with a monthly mortgage estimate.
Keep in mind that a calculator is only a starting point. To get a more personalized view, it helps to get prequalified or request a customized rate quote. These steps give you a clearer picture of the loan amount, terms, and monthly payment you may qualify for based on your income, debts and other financial details.
Knowing how much you can afford to spend on a home is only part of the process. Finding the right property, having an experienced real estate agent, and navigating ins and outs of financing, plus the logistics of moving, can be overwhelming. Alliant Journey Home guides you through every stage of buying and moving into a home, from financing and finding an agent to moving in together in one place, while also helping you earn money back at closing.*
Here's a closer look at the offer:
Journey Home works for first-time buyers, repeat buyers, and homeowners looking to refinance. One more perk worth noting: you can access the real estate benefits even if you choose not to finance through Alliant.*
To register or learn more, visit the Journey Home program page. Just remember to sign up before you connect with a participating agent, since the rewards apply when you work with a Journey Home-introduced agent. Secure a home loan from Alliant Credit Union You've done the hard part—understanding your budget, your debt-to-income ratio, and your down payment options. The next step is putting that knowledge to work. Alliant Credit Union offers a range of home loan options along with tools to help you plan your purchase.
Ready to move forward? Explore mortgage programs, get prequalified with no application fee, request a customized rate quote, or connect with an Alliant mortgage loan officer to talk through your options. And don't forget to check out Journey Home to see how much you could earn back at closing on your path to your new home.
* The cash back bonus is offered in most states. In some states, a gift card or commission reduction at closing may be provided in lieu of the cash back bonus. The program is not available for employer-sponsored relocations or transactions in Iowa or outside the United States. The cash back bonus is not available in Alaska and Oklahoma. In Kansas and Tennessee, a MasterCard® MAX gift card will be issued. In Mississippi, New Jersey, and Oregon, a commission reduction may be available at closing. The cash back bonus is only available with the purchase and/or sale of your home through the use of a program-introduced real estate agent. The actual amount you receive is based on the purchase and/or sale price of your home. The program award is not available in certain transactions with restricted or reduced agent commissions (including many new construction, For Sale by Owner, or For Sale by iBuyer transactions or where a minimum transaction side commission is not paid). Your assigned agent or a real estate coordinator can help you identify any transactions where the award would not be available. All real estate commissions are negotiable. Participating program real estate agents are affiliated with the participating real estate brands: Coldwell Banker®, Century 21®, ERA®, Better Homes and Gardens Real Estate®, and Corcoran Group® and all related logos are trademarks owned or licensed by Anywhere Real Estate or its affiliated companies. Customers are not required to receive financing through Alliant Credit Union in order to receive benefits of this program, with exception to the complimentary one-year home warranty. This is not a solicitation if you are already represented by a real estate broker. Please check with a program coordinator for details. Program terms and conditions are subject to change at any time without notice. Additional terms, conditions, and restrictions apply. Full disclosures of Alliant Journey Home Program Disclaimer (PDF).
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