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To determine how much home you can afford, look at two types of expenses: how much you’ll spend on your home each month, and how much you’ll pay to buy it in the first place.

You might think that these two numbers simply break down into how much you will be spending on your mortgage and advance payment – but there is more to it.

When buying a house, the general rule is that you must spend 28% or less of your gross monthly income on housing costs. This includes your mortgage payments and any other monthly household expenses, such as insurance, taxes and homeowners association dues.

To calculate 28% of your monthly income, multiply your gross monthly income (that’s your income before taxes) by 0.28.

Let’s say your monthly income is $ 4,000. Multiply $ 4000 by 0.28 and your total is $ 1120. If you stick to the 28% rule, you can afford to spend up to $ 1,120 per month on your home, including your mortgage, interest, property taxes, home insurance, and contributions from homeowners associations.

If you have too much debt to pass the 28% test, don’t throw in the towel just yet. There are a few exceptions.

A lender can still approve your application if other parts of your financial profile are exemplary. Maybe you have a excellent credit rating or more than 20% for a deposit.

You should also remember that this rule mainly applies to conventional mortgages. If you qualify for a government guaranteed mortgage FHA, Virginia, or USDA, a lender could approve your request with a higher percentage of your income going towards housing expenses.

Your mortgage will make up the bulk of your monthly payments, so it’s essential to think about how much you’ll borrow. Before you approve a home loan, a lender reviews your financial profile. It looks at three main factors: down payment, credit rating, and debt-to-income ratio.

The stronger your finances, the more money the company will lend you.

If you want a $ 200,000 mortgage, but your lender won’t approve you, you can’t afford a home that requires a $ 200,000 loan. You will either need to change your finances or reduce your home buying budget.

Here’s the down payment, credit score, and DTI ratio you’ll need to get a mortgage, along with some suggestions for improving them so you can borrow more.

Deposit amount

You will need at least 10% for a down payment for a compliant loan, or 3% if the conventional loan is backed by government funded mortgage companies Freddie Mac or Fannie Mae. For a jumbo loan, many lenders require at least 20% upfront.

A FHA mortgage requires a deposit of 3.5%. If you are eligible for a USDA backed loan or VA, then you may not need a down payment at all.

here are the minimum down payments required. But if you have more for a deposit, then you might be allowed to borrow more. (And at a lower interest rate!)

Credit score

For compliance, you will need at least a credit score of 620. A jumbo loan generally requires a score of 700 or more.

You will need a credit score of 580 for an FHA loan and 640 for a USDA loan. The score required for a VA loan will depend on your individual lender.

But the higher your credit score, the more you might be allowed to borrow.

Improve Your Credit Score might take a bit of time, but it’s not too difficult if you know the steps involved. The most important factor is making all of your payments on time. Try to set up automatic payments on all of your bills so you’re never late.

Another big part of your credit score is your amount owed, or the percentage of your available credit that you use (you might hear it called the “credit utilization ratio”). Try paying off some debt or asking to increase your credit card spending limit so that your percentage goes down – if you honestly think you can practice self-control with a higher spending limit.

Debt-to-income ratio

Your debt to income ratio is the amount you owe versus what you earn. To calculate your DTI ratio, add up your monthly debt expenses, such as rent, credit card payments, and student loan payments. (Non-debt expenses, like groceries, don’t count.)

Then divide your total monthly debt expenses by your monthly income. For example, if you pay $ 1,000 a month in debt and earn $ 4,000 a month, you would divide 1,000 by 4,000 for a total of 0.25. Your DTI ratio is 25%.

Conventional mortgages generally allow a minimum DTI ratio of 36%, but the ratio may be a bit higher for FHA, VA, USDA, and jumbo loans. You may be able to get a mortgage with a higher DTI ratio if you have a great credit score.

The lower your DTI ratio, the more your lender can authorize you to borrow. To lower your DTI ratio, you can pay off a credit card or refinance student loans for lower monthly payments, whether that would be a strong financial decision overall.

If your monthly housing costs are a huge percentage of your income, you may want to take out a smaller mortgage or find a home with less fees. Here are the housing costs to consider:

Mortgage payment

Your mortgage payment will be your biggest housing cost each month. The amount you pay per month will depend on a) the amount you borrowed and b) your interest rate.

Property taxes

Property taxes can reach hundreds or even thousands of dollars a year.

The amount you pay in property taxes largely depends on where you live. For example, you might pay less in Arkansas than in North Carolina, but you will also pay less in some areas of Arkansas than in others. Property tax costs also depend on the assessed value of your home. The more your home is worth, the more property taxes you will pay.

Home insurance

Home insurance protects you in the event of a problem. Maybe a tornado is damaging your home, or a thief breaks in and steals valuables, or a tree falls on the roof.

The average annual cost of home insurance in the United States was $ 1,211 in 2017, according to the National Association of Insurance Commissioners. Your payment will depend on factors such as the age of your home, its estimated value, and where you live.

Private mortgage insurance

While home insurance protects you and your home, PMI protects the lender in the event of your mortgage default.

You will need PMI if you have less than 20% for a down payment on a conventional mortgage. The lower your down payment, the higher the risk the lender considers you to be. PMI helps offset this risk.

Keep in mind that the PMI is only for conventional mortgages. This means you don’t need PMI if you have a government guaranteed loan – including an FHA, VA or USDA loan.

The PMI typically costs between 0.2% and 2% of your mortgage amount. The cost will depend on the length of your loan, loan-to-value ratio, and credit score.

Contributions to homeowners associations

A homeowners association (HOA) is a private organization that maintains the quality of a neighborhood. Not all neighborhoods have an HOA, but if you move to an area with an association, then you will pay contributions and should follow HOA guidelines.

Depending on where you live, HOA dues can cost you up to a few hundred dollars per month.

Real estate websites like Zillow and Trulia include dues from homeowners associations on a listing of properties. This can be a quick way to find out if the charges are too high for your budget.

Yes, calculating your monthly payments is important. But you should also think about how much you can afford to pay during the home buying process. Here are three factors to consider:

Advance payment

This is probably the initial cost that people think about the most. Do you have the minimum down payment required for your type of loan?

You will need 3% for a conforming mortgage backed by Freddie Mac or Fannie Mae, 20% for a jumbo mortgage, and 3.5% for an FHA mortgage. You may not need a down payment for a USDA or VA mortgage.

Closing costs

do not forget to factor closing costs into your budget. Closing costs include costs such as administration costs, evaluation costs and settlement costs. Some lenders require you to pay certain property taxes at closing, while others let you wait for your first monthly payment.

According to mortgage technology company ClosingCorp, the average closing costs in 2020 were $ 6,087 including tax or $ 3,470 excluding tax.

How many savings do you want you have left?

You probably don’t want to use up 100% of your savings to buy a house, but find yourself in a bind in case of financial emergency. Think about how much money you want to save once you’ve made the down payment and covered the closing costs.

Laura Grace Tarpley is the managing editor of banking and mortgage services at Personal Finance Insider, which covers mortgages, refinancing, bank accounts and bank reviews. She is also a certified personal finance educator (CEPF). In her four years of covering personal finance, she has written extensively on how to save, invest, and find loans.