Step 1: Set Your Home Buying Budget

Know your price range and a monthly payment you're comfortable with before you look at a single listing.

Your budget is the most important number in the whole process. It decides which homes you look at, which loan program fits, and how much you offer. Lenders will tell you the most you can borrow; your job is to decide what you want to pay each month.

Start with the monthly payment, not the price

A mortgage payment is more than principal and interest. Lenders count the full housing payment, called PITI:

• Principal and interest on the loan
• Property taxes, usually collected monthly into an escrow account
• Homeowners insurance
• Mortgage insurance if you put down less than 20% on a conventional loan, or any amount on FHA
• HOA dues if the home is in an association

Two homes at the same price can have very different payments because of taxes, insurance and HOA dues. That's why Unbeatable estimates the payment for the specific home, not a generic price.

How lenders measure what you can afford

Lenders compare your monthly debts to your gross monthly income, the amount before taxes. That comparison is your debt-to-income ratio (DTI).

• The front-end ratio is the new housing payment divided by income.
• The back-end ratio adds car loans, student loans, credit card minimums and other monthly debts.

Example: you earn $8,000 a month before taxes and pay $600 a month on a car and student loan. A $2,600 housing payment gives a front-end ratio of 32.5% and a total DTI of 40%. Most programs would consider that.

Leave room for life

The maximum approval is rarely the right budget. Keep reserves for repairs, job changes and the first year of ownership. Many buyers aim for a total payment that leaves at least a few hundred dollars of slack each month after savings.

What to do next

1. Add your income, monthly debts, credit range and savings to your Unbeatable profile.
2. Look at your buying power: the price range those numbers support today.
3. Move on to checking your credit, which changes your rate and therefore your budget.

Your next move, by loan program

• Conventional: Conventional loans usually allow a debt-to-income ratio up to about 45%, sometimes 50% with strong credit and reserves. See my buying power
• FHA: FHA can approve higher debt-to-income ratios than conventional loans when the automated findings allow it, which can stretch your budget if credit is still building. See my FHA buying power
• VA: VA looks at residual income (what's left each month after major expenses) as well as debt-to-income, so family size and location matter. See my VA buying power
• USDA: USDA usually looks for a housing ratio near 29% and total debts near 41%, and your household income must be under the area limit. Check my USDA budget
• Jumbo: Jumbo lenders tend to want a lower debt-to-income ratio (often 43% or less) and several months of reserves after closing. Estimate a jumbo budget
• Investor: Investor loans like DSCR qualify from the property's rent instead of your personal income, so the budget starts with the deal, not your paycheck. Explore DSCR loans