When looking to purchase a new home in Chicago, it’s pretty easy to figure out what you want, like the neighborhood, number of bedrooms, property type, outdoor space, or other items on your wish list. But it can be much more challenging to figure out how much house you can afford in Chicago.

Crunching the numbers so that you have a realistic sense of how much a purchase will actually cost you and comparing that to your capacity to meet those obligations requires a clear framework. It also means developing a budget that takes into consideration how much of a down payment you can make, what you can handle in terms of debt, the costs you will incur beyond the purchase price, and whether your credit is such that you will be able to obtain financing at a reasonable rate.

While every home buyer has different circumstances, priorities, and concerns, here are some general rules to guide you as you determine whether that dream home that has captured your imagination is within your reach.

How Much Do Chicago Houses Cost?

While housing stock in Chicago covers a wide range of price points – from the low six-figures to the low eight-figures – the median price for all types of homes in Chicago was $297,000 in March 2020. The average effective property tax rate is 1.56%, but this can vary a lot by neighborhood. Additionally, the actual cost of a home includes other expenses such as insurance, any condo or homeowners’ association fees, utilities, and maintenance.

For a home at the $297,000 median price, with a 3.8% interest rate and 20% down payment, the cost per month for taxes, insurance (estimated at $1,000 per year for a single-family home), and principal and interest would be approximately $1,550 per month.

The 30% Rule

A general rule-of-thumb when assessing how much you can afford in Chicago for housing costs is one-third of your annual salary before taxes. Obviously not everyone can stick to the 30% rule, but it is a good gauge if you’re trying to stay financially savvy when it comes to investing in a new home.

Using the one-third of the annual salary benchmark, a buyer of the median-priced home in Chicago would need to make $55,800 a year ($4,650 a month) to live comfortably.

For a downtown condominium, where the median sales price is $410,000, the costs would rise to about $2,515 per month if you lower the insurance to $500 and also include the monthly HOA fee of $400 (estimated). The purchaser of that condo would thus need to earn $7,545 per month, or $90,540 a year, to afford it without overleveraging themselves.

Use a Mortgage Calculator

When you are ready to move beyond the abstract and start using real numbers, real homes, and real calculations to determine how much home you can afford in Chicago, online mortgage tools can help you figure out where you stand. Punch figures into Z Chicago’s Mortgage Calculator to get a preliminary idea of what your monthly payments would look like. In many cases, you might wind up spending less on your mortgage than you do your rent.

Get Pre Approved for a Mortgage

Although you can estimate a comfortable monthly payment, speaking to a lender and getting prequalified or preapproved is the only concrete way to determine how much home you can afford.

With prequalification, the lender gives you an estimate of what you can afford based on a conversation about your finances. It’s a good starting point, but most buyers will also need to get preapproved before making an offer and therefore skip the prequalification step altogether. With mortgage pre-approval, the lender reviews your credit report and verifies your income, assets, and debts to confirm that you are eligible for a home loan. Pre-approval letters are usually good for 90 days, so only get preapproved if you plan to purchase a home in the near future.

Borrowers can shop around for mortgage rates from multiple lenders without worrying about repeated hard credit inquiries.  The newest FICO scoring models provide a 45-day window to count all mortgage inquiries as a single hard credit pull. And, FICO scores don’t count the first hard inquiry against you until 30 days later, so if you want to apply with a different lender, they’ll see your score as it was before the first inquiry.

Once you have a preapproval in hand, your real estate agent can also help you figure out how to line up your financial resources with homes that fit the bill. Not only do we consider the purchase price, but we’ll also help you navigate HOA fees, possible upcoming special assessments, maintenance, utilities, and any property tax increases. Knowing what you can afford before you start making offers can get you in the home of your dreams without getting you caught in a financial nightmare.