How Much House Can You Afford?
How lenders think about income and debt, and how to build a realistic home budget.
The price a lender approves is not always the price you can live with comfortably. Understanding the common ratios lenders use, and adding your own reality check, helps you choose a home budget with room to breathe.
The 28/36 guideline
A common rule of thumb says housing costs should be about 28% of gross monthly income, and total debt payments, including housing, about 36%. These are guidelines, not universal limits; actual requirements depend on the loan program, credit and other factors.
A worked example
Suppose gross income is $90,000 a year, or $7,500 a month, with $500 in other monthly debt payments. The 28% limit gives $2,100 for housing. The 36% limit, minus $500 in debts, gives $2,200. The lower of the two, $2,100, is the housing budget.
If $500 of that goes to property taxes, insurance and HOA, $1,600 remains for principal and interest. At 6.5% over 30 years, that supports a loan of about $253,137. With a $60,000 down payment, the estimated price is roughly $313,137.
What affects the answer
- Interest rate: a higher rate reduces the loan your budget supports.
- Down payment: more down raises the price you can reach.
- Other debts: car, student and card payments reduce your housing budget.
- Taxes and insurance: these vary a lot by location.
Costs buyers forget
Beyond the mortgage, plan for maintenance, repairs, utilities, HOA dues and furnishing. Many owners set aside a percentage of the home's value each year for upkeep. A newer home may need less maintenance early on, while an older one may need more.
Lender approval versus personal budget
Lenders may approve more than you want to spend. Look at your own monthly spending, savings goals and job stability. If your income is variable or you have other goals, aim lower than the maximum.
Improve your buying power
- Pay down existing debts to free up monthly cash flow.
- Raise your credit score to qualify for better rates.
- Save a larger down payment.
- Compare lenders to find the best rate and fees.
Get preapproved
A preapproval from a lender gives a clearer picture of your range and shows sellers you are serious. Treat it as a ceiling to compare against your own budget, not a target.
Try it yourself
Enter your income, debts and down payment in the home affordability calculator, then test a specific home in the mortgage calculator.
Account for your lifestyle
Ratios treat everyone alike, but households differ. Childcare, commuting, health costs and savings goals all compete for the same income. List your monthly spending honestly and see how much room remains after the housing payment. A payment that meets a lender ratio can still feel tight if other priorities are important to you.
Plan for change
Consider how a rate change on an adjustable loan, a rise in taxes or insurance, or a dip in income would affect you. Building a buffer into your budget, and keeping an emergency fund, makes homeownership more resilient than buying at the very top of your range.
Test different rates
Because rates change, run your budget at a few rates, such as one point higher and lower than today, to see how sensitive your price range is. Even a small rate shift can move the loan your budget supports by tens of thousands of dollars, so build in a margin before you fall in love with a home at the top of your range.
Do the math before you shop
Decide your maximum comfortable payment first, then look only at homes below it. Starting with the budget keeps the search realistic and reduces pressure during negotiations.
Important
This guide is educational and not individualized financial advice. Loan terms vary by borrower, lender and market, so confirm details in the official disclosure.