What is home buying power and why does it matter?

Woman calculating buying power


Home buying power is one of the most important factors to consider when purchasing a home. It’s not only about how much you can afford, but also about making sure you have the right loan and mortgage products to fit your needs.

In this blog post, I’ll answer “What is home buying power?”, and how you can make sure you have the maximum amount of purchasing power possible.

Home buying power defined

When purchasing a home with a mortgage, your bank will qualify and pre-approve you for a maximum home price. This amount is your buying power. This amount is determined by several factors within your control and some outside of your control that go into the calculations that determine how much you can afford.

Though it is important to consider your monthly budget–the total amount of money you have each month to spend on a mortgage after your fixed bills and expenses– when considering your monthly mortgage payment, your monthly budget does not equal your buying power.

You can have two home buyers with the same monthly house payment, but because of various qualifying factors, their buying power and affordability can be very different.

For most people, their home is the biggest purchase they will ever make. It’s important to understand what factors influence your buying power before you shop for a new place. 

Factors that influence your home buying power

Typically, your financial ability to purchase a home is measured by several factors, including:

Your credit score

Having a good established credit history is not only important for getting loans and making big purchases; it can also play an essential role in determining your home buying power.

Your score reflects your ability to handle debt, and this has a direct impact on how much you can afford to purchase a house. A high score will increase your borrowing capacity, allowing you to take out a larger mortgage or qualify for a better mortgage rate.

But a low score can cause limited financing options, putting you at a disadvantage when you’re ready to make one of the biggest investments of your life.

So whether you’re looking to buy your very first home or are just in the market for a change, it’s important to be mindful of your credit score and do what you can to maintain and improve it.

Your payment history, variety of credit institutions, and amounts owed are all under consideration by mortgage lenders.

With the right mindset and smart financial habits, you’ll be well on your way to building long-term financial stability and finding the perfect place to call home.

Your income and debt-to-income ratio

Your income is a crucial indicator of your ability to afford a mortgage, as well as other living expenses. And because lenders typically require that your monthly debt commitments not exceed 43% of your income, your debt-to-income ratio is also an important factor in determining whether you have enough buying power.

Obviously, the higher your income and the lower your DTI, the more financial flexibility you will have when purchasing a home. And while improving these figures can be challenging depending on your specific situation, there are certain actions you can take to help boost them.

For example, you could try lowering your current monthly expenses by reducing or canceling unused subscriptions or getting rid of extraneous spending habits, such as eating out too often or making impulsive purchases on credit cards.

You may be able to increase your income by looking for additional sources of revenue through side gigs or finding new opportunities within your current job.

Ultimately, the key is to find the right balance between increasing your income and paying down any existing debts so that you can boost your total buying power.

Interest Rates

Many of the determining factors that affect your home purchasing power are within your control, but the overall health of the economy and federal interest rates are out of our control. And unfortunately, this is a huge affordability determining factor.

If your mortgage rate increases before you find a home, your buying power will decrease and you’ll no longer qualify to borrow as much for a home. This may force you to look for homes in a lower price range.

According to CNBC, the 2022 interest rate hikes cost many home buyers 16% or $165,000 in purchasing power.

Do what you can to improve the factors you can control and consider putting down a higher down payment to decrease your loan amount. In the future, if the average mortgage rate decreases again, you can always consider refinancing to a lower rate.

The current market value of homes in your area

There has always been a strong connection between the market value of homes and home buying power. As the average sales price increases within a market, buyers will need to qualify to borrow more money to afford a higher valued home.

And as home values increase, annual property taxes may also increase. Property taxes are factored into your monthly mortgage payment, so a home with a higher property tax may decrease your purchasing power.

When looking to purchase your next home, it’s important to keep your local area’s market value in mind, along with average property tax rates, as well as other key economic indicators.

It’s best to work with an experienced real estate agent who can help you navigate the complex world of housing economics, and ensure that you’re getting the best deal possible in the current real estate market.

Your length of employment and employment status

Your employment status and the length of time you have worked at that occupation are two important aspects that will affect your purchasing power. If you’re just starting your career, you may not have the same buying power as someone more established in their job.

The good news is there are a variety of loan and home buying programs created specifically for first-time buyers, self-employed buyers, and buyers who just started in certain professions to help their ability to afford a home loan.

Other aspects that can affect your home buying power

  • Your savings and liquid assets
  • Whether you’re buying a new home or refinancing an existing one
  • Whether you are buying a home for the first time or not
  • Type of property being purchased
  • Whether the home is an investment property or an owner-occupied property

How to calculate your home buying power

Below is a rough guide to estimate how much you can afford for a home purchase, but be sure to speak to a mortgage loan office for a more accurate determination.

Determine how much you can afford to spend on a home

The first step in determining how much you can afford to spend on a home is to calculate your monthly budget. To do this, simply add up your gross monthly income from all sources. This includes things like your salary, bonuses, commissions, and self-employment income.

Once you have your monthly income figure, you’ll need to subtract any taxes and other mandatory deductions. This will give you your net monthly income, which is the amount of money you have to spend each month.

Now that you have your monthly income figure, you’ll need to consider your other monthly debts. This includes things like credit card payments, student loans, and car loans. Be sure to add up all of your monthly debts and subtract them from your monthly income.

The resulting number is your monthly disposable income. This is the amount of money you have left over each month after paying your debts. This number will give you a good idea of how much you can afford to spend on a home.

Calculate your debt-to-income ratio

DTI is a measurement that mortgage companies use to compare your monthly debt obligations to your monthly income.

To calculate your DTI, simply add up all of your monthly debts (including things like credit card payments, student loans, and car loans) and divide it by your monthly pre-tax income. The resulting number will give you a good idea of how much of your income is going towards debt each month.

Lenders like to see a DTI of 36% or less, so your monthly debts — including your mortgage payment — should not exceed 36% of your monthly income. If your DTI ratio is too high, it may be difficult to qualify for a mortgage or other types of financing.

However, if your DTI ratio is low, you may get a better mortgage rate and have more buying power for purchasing a home.

Consider your credit score and history

Your credit score is one of the most important factors in determining your home buying power. A higher credit score means you’re a lower-risk borrower, which could lead to a lower interest rate on your mortgage. That’s important because a lower interest rate could save you thousands of dollars over the life of your loan.

Your established credit history is also important. Mortgage lenders will want to see that you have a history of making on-time payments.

So, when you’re considering your home buying power, be sure to check your credit report to see your credit score and history. They could make the difference between getting your dream home or having to settle for a home in a lower price range.

Estimate your down payment amount

Another factor that will affect your home buying power is your down payment. A higher down payment will give you more buying power because it will lower your loan amount and your monthly payment.

A down payment of 20% or more will also allow you to avoid paying for private mortgage insurance (PMI), which is insurance that protects the lender in case you default on your loan. PMI can add hundreds of dollars to your monthly payment, so it’s important to factor it into your home buying power calculation.

If you don’t have a lot of money saved for a down payment, there are programs available that can help. The Federal Housing Administration (FHA) offers loans with down payments as low as 3.5%.

And the Veterans Administration (VA) offers loans with no down payment for qualifying veterans and their spouses. So, even if you don’t have a lot of money saved, you may still be able to purchase a home.

Calculate your monthly mortgage payment

For your home buying power calculation, you’ll also need to estimate your monthly mortgage payment. This can vary depending on the type of mortgage you get.

The most common type of mortgage is a 30-year fixed-rate mortgage, in which you’ll have the same interest rate and monthly payment for the life of the loan. But there are other options, too.

You might choose a 15-year fixed-rate mortgage, which has a shorter loan term but a higher monthly payment. You might also choose an adjustable-rate mortgage (ARM), which has an initial interest rate that is lower than the 30-year fixed-rate but can increase or decrease after a set period of time.

You can use a mortgage calculator to estimate your monthly payment based on the loan amount and interest rate. Or you can talk to a loan officer and get a more accurate estimate based on your specific situation.

Factor in other associated costs of homeownership

Besides the purchase price, you’ll need to budget for things like property taxes, homeowner’s insurance, if you’ll have to pay a homeowners association fee, general home maintenance, and repairs. If you’re not prepared for these additional costs, you could find yourself “house poor” – meaning your home consumes a large portion of your monthly income.

By taking the time to calculate your total buying power, you can avoid this pitfall and be sure that you’re prepared for all the costs of homeownership.

Estimate your closing costs

Closing costs are fees paid to cover the costs associated with finalizing and closing on your new home. They include things like loan origination fees, appraisal and inspection fees, credit check fees, and title and settlement costs.

Estimating your closing costs should be relatively easy if you’ve worked with a loan officer and a real estate agent. They should be able to give you a good idea of how much you’ll owe at closing.

Closing thoughts on home buying power

Remember, your buying power is unique to your financial situation. By saving up for a larger down payment, shopping around for the best mortgage rates, and working with a qualified real estate agent, you can make the most of your situation and find the perfect home for you.

Use the tips above to calculate your buying power and find a home that is perfect for you.


Cristina Morizio

Long Island real estate agent Cristina Morizo
As an experienced REALTOR® and Long Island native, I know the ins and outs of the real estate market. I help home buyers, sellers, investors and homeowners navigate and negotiate. Questions? Ready to buy or sell? Let’s talk!

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