How Much House Can I Afford?

There are two answers to this question: what a lender will let you borrow, and what you can comfortably pay. They are often different numbers, and the second one is the one that matters. Here’s how to work out both.

The 28/36 rule

The traditional guideline lenders use has two parts:

• 28% front-end ratio. Your total housing payment — mortgage principal and interest, property tax, home insurance, HOA dues, and mortgage insurance if any — should be no more than 28% of your gross (pre-tax) monthly income.
• 36% back-end ratio. Housing payment plus all other monthly debt payments — car loans, student loans, minimum credit-card payments — should be no more than 36% of gross monthly income.

Many lenders will stretch beyond these. Conventional loans often allow a back-end ratio up to 43–45%, and FHA loans sometimes 50%. Just because you can be approved at 45% doesn’t mean it’s wise; at that level a single car repair or medical bill becomes a crisis.

Worked example

Household income: $110,000 a year → $9,167 a month gross. Existing debts: a $450 car payment and $200 in student loans.

	Calculation	Amount
Max housing payment (28%)	9,167 × 0.28	$2,567
Max total debt (36%)	9,167 × 0.36	$3,300
Minus existing debt	3,300 − 650	$2,650

The tighter constraint is the 28% rule: about $2,567 a month for everything housing-related.

Now back out the non-mortgage pieces. Suppose property tax is about 1.1% of the home’s value per year and insurance is $1,500 a year. On a $400,000 home that’s $367 + $125 = $492 a month, leaving roughly $2,075 for principal and interest.

At 6.5% on a 30-year loan, $2,075 a month supports a loan of about $328,000. With a 20% down payment ($82,000), that’s a purchase price around $410,000. With 10% down, PMI adds roughly $150–250 a month, which pulls the affordable price down to about $370,000.

The quickest way to test your own numbers is to open the mortgage calculator, enter a candidate price with your rate, tax and insurance, and adjust the price until the total monthly payment lands under your 28% figure.

What lenders look at besides the ratios

• Credit score. It sets your rate, and a rate difference of 1 percentage point changes the affordable price by roughly 10%.
• Down payment. Below 20% you’ll pay PMI on conventional loans. Below 10% your options narrow.
• Cash reserves. Many lenders want to see 2–6 months of payments in the bank after closing.
• Employment history. Two years in the same line of work is the usual expectation; self-employed buyers need two years of tax returns.

The costs people forget

The mortgage payment is not the cost of owning a home. Budget for:

• Closing costs: 2–5% of the price, paid up front. On $400,000 that’s $8,000–20,000 on top of the down payment.
• Maintenance: the common rule is 1–2% of the home’s value per year. A $400,000 house means $4,000–8,000 a year, lumpy and unpredictable.
• Utilities: usually higher than in a rental, especially for an older or larger home.
• Moving, furniture, immediate repairs: first-year costs that routinely run $5,000–15,000.

A useful habit: whatever monthly housing payment you’re considering, add 15% for maintenance and utilities and ask whether that number is comfortable.

A more conservative approach

Plenty of financial planners recommend a stricter rule for personal comfort: keep the housing payment under 25% of take-home (after-tax) pay on a 15-year mortgage. It produces a much lower maximum price than the 28/36 rule, but leaves room for saving, investing and the unexpected. If the 25%-of-net number seems impossibly low where you live, that’s useful information about the local market rather than a reason to stretch.

Quick checklist

1. Compute 28% and 36% of gross monthly income; subtract existing debts from the 36% figure; the smaller result is your ceiling.
2. Subtract estimated tax, insurance, HOA and PMI to get the amount available for principal and interest.
3. Use the mortgage calculator to convert that payment into a loan amount at your rate and term.
4. Add your down payment for the maximum price — then deliberately shop below it.

If you’re paid hourly, the salary calculator converts your wage into the annual and monthly figures these ratios need.