How Much House Can I Afford?
Buying a home is the biggest financial decision most people make. The question isn't just "What price are you approved for?" but "What can you actually afford without stretching too thin?"
The 28/36 Rule
Lenders use two key ratios:
28% Rule: Housing costs (mortgage, taxes, insurance) should not exceed 28% of gross monthly income.
36% Rule: Total debt payments (housing + car loans + credit cards + student loans) should not exceed 36% of gross monthly income.
Example: $80,000 Annual Income
Gross monthly income: $80,000 ÷ 12 = $6,667
Max housing cost (28%): $6,667 × 0.28 = $1,867/month
- Includes: mortgage, property tax, homeowner's insurance, HOA
Max total debt (36%): $6,667 × 0.36 = $2,400/month
- Includes: all of the above + car payment + student loans + credit cards
If you have a $400 car payment and $200 student loan payment, you have: $2,400 − $600 = $1,800/month available for housing.
Calculating Maximum Home Price
Use this formula:
Max Home Price = (Max Monthly Payment × 12 ÷ 0.00583 − Down Payment) / 0.72
(Simplified; use the Mortgage Calculator for exact figures)Let's work through a real example:
Your situation:
- Annual income: $100,000
- Down payment available: $50,000 (10%)
- Mortgage rate: 6.5% (current 30-yr rate)
- Property tax + insurance: ~$250/month
- No other debt
Step 1: Calculate housing budget
- Max monthly housing cost (28%): $100,000 ÷ 12 × 0.28 = $2,333
- Subtract property tax + insurance: $2,333 − $250 = $2,083 available for mortgage principal + interest
Step 2: Use mortgage calculator
- Monthly payment for principal + interest: $2,083
- Mortgage rate: 6.5%
- Loan term: 30 years
- Max loan amount: ~$315,000
- With $50,000 down: Max home price ≈ $365,000
Factors Beyond Income
Lenders also consider:
Credit score: 620+ to qualify, but 740+ for best rates Down payment: 3–20% (lower = higher monthly payment + PMI) Debt-to-income ratio: Discussed above; critical threshold Employment history: Stable 2-year track record preferred Reserves: Savings for 3–6 months of payments (reduces risk)
The Hidden Costs of Homeownership
The mortgage isn't everything. Budget for:
| Cost | Estimate |
|---|---|
| Property tax | 0.5–2% of home value annually |
| Homeowner's insurance | $1,000–$3,000 annually |
| HOA fees (if applicable) | $50–$500+ monthly |
| Utilities (increase) | +$50–$150/month vs. renting |
| Maintenance & repairs | 1–2% of home value annually |
| PMI (if <20% down) | 0.3–1.5% of loan annually |
A $300,000 home might cost $2,000/month in mortgage but $2,700+/month all-in.
The 2-Year Rule
Don't buy a home unless you plan to stay 2+ years. Closing costs (3–6% of purchase price) and realtor fees (5–6% of sale price) mean you need appreciation or long ownership to break even.
Example: $300,000 home with 5% closing costs ($15,000) + 5.5% realtor fees on sale ($16,500). Total: $31,500 sunk cost.
At 3% annual appreciation: Break-even in ~3–4 years. At 2% annual appreciation: Break-even in ~5 years.
If you might move in 2 years, consider renting instead.
How Much Should You Actually Spend?
The 28/36 rule is a lender's risk floor, not your personal comfort zone. Consider:
Conservative approach: Spend 20–25% of gross income on housing.
- More margin for job loss, emergencies, lifestyle
- Easier to build wealth (more left for savings/investments)
Moderate approach: 25–28% of gross income.
- Follows lending guidelines
- Requires stable income and emergency fund
Aggressive approach: 30–35% of gross income.
- Leaves minimal margin for error
- Makes job changes or emergencies stressful
- Reduces savings capacity
Red Flags
- "You're approved for $500k but earn $80k" — Just because you're approved doesn't mean you should spend it.
- "Stretch for the right neighborhood" — Wrong. Buy what fits your budget; upgrade later as income grows.
- "Your payment will be covered by rental income" — Rental properties have vacancies, repairs, taxes. Never count on it 100%.
- "Rates are low now; buy before they go up" — FOMO isn't a financial plan. Buy when it aligns with your budget and timeline.
The Mortgage Calculator
Enter:
- Home price
- Down payment percentage
- Mortgage rate (current: 6.3% for 30-yr, via FRED)
- Property tax and insurance estimates
Get:
- Monthly P&I payment
- Full monthly cost (PITI)
- Total interest paid over life of loan
- Amortization schedule
Next Steps
- Check your credit score (creditkarma.com, annualcreditreport.com)
- Get pre-approved with a lender (doesn't commit you)
- Calculate affordability (use our mortgage calculator)
- Shop for rates (get quotes from 3–5 lenders)
- Work with a realtor in your target market
- Get a home inspection before you commit
The Bottom Line
You can afford a home when:
- Housing costs are ≤28% of gross income
- Total debt is ≤36% of gross income
- You have 3–6 months of expenses in savings
- You plan to stay 2+ years
- You can comfortably handle a 1–2% rate increase
Use our Mortgage Calculator to run scenarios. Then talk to a lender — but remember, approval doesn't equal affordability.
This article is for educational purposes and does not constitute financial or legal advice. Consult with a mortgage lender and real estate attorney for personalized guidance.