How Much House Can I Afford?

How much house you can afford depends mainly on your gross monthly income, your existing monthly debt payments, your down payment and current mortgage rates. A widely used rule of thumb is to keep your total housing payment at or below about 28% of your gross monthly income and all your debt payments at or below about 36%. For someone earning $8,000 a month with a $450 car payment, that points to a home price of roughly $350,000 with 20% down at a 6.5% rate.

That’s a starting point, not a verdict. Below, you’ll see how lenders measure affordability, how to work out your own number step by step, and what costs people often forget.

The number lenders care about: debt-to-income ratio

Lenders use your debt-to-income ratio (DTI) to judge whether you can handle a mortgage payment. The Consumer Financial Protection Bureau defines DTI as all your monthly debt payments divided by your gross monthly income. In the CFPB’s own example, $2,000 of monthly debt payments on $6,000 of gross monthly income gives a DTI of 33%.

You’ll often hear about two versions:

• Front-end ratio: Just your housing payment (principal, interest, property taxes, homeowners insurance, and any HOA dues or mortgage insurance) divided by gross income.
• Back-end ratio: Your housing payment plus all other monthly debt payments, such as car loans, student loans, minimum card payments and personal loans, divided by gross income.

There’s no single official cutoff. As the CFPB puts it, different loan products and lenders have different DTI limits. The 28% and 36% figures are a conservative rule of thumb that many buyers use for planning, and some loan programs allow higher ratios.

Step-by-step: estimate your own budget

Step 1: Find your gross monthly income

Use your income before taxes. If you earn $96,000 a year, that’s $8,000 a month. If your income varies, lenders typically look at a longer track record, so use a conservative average.

Step 2: Calculate your two limits

Using the 28/36 rule of thumb with $8,000 of income and a $450 car payment:

Use the lower of the two: $2,240 a month for your total housing payment. If you had more debt, the back-end limit would be the one holding you back.

Step 3: Turn the payment into a home price

Your housing payment includes more than the loan. Assuming 20% down, a 6.5% rate on a 30-year fixed loan, property taxes of 1.1% of the home’s value per year and $1,800 a year for homeowners insurance, a $2,240 monthly payment supports a home price of about $350,000 (precisely, about $349,896).

Here’s what a $340,000 home looks like with those same assumptions:

That’s a front-end ratio of about 27.3% and a back-end ratio of about 32.9%, both inside the guideline.

Step 4: Test a more expensive home

Now try a $400,000 home with 20% ($80,000) down and the same rate, tax and insurance assumptions. The total housing payment is $2,539.28 a month, which works out to a front-end ratio of about 31.7% and a back-end ratio of about 37.4%. Some lenders may approve that, but it’s above the conservative guideline, and the extra $358 a month would have to come from somewhere else in your budget.

The mortgage calculator uses that $400,000 example as its default. Enter your own price, down payment, rate, tax rate and insurance to see your full monthly cost.

How the interest rate changes what you can afford

Rates have a big effect on affordability. On the same $340,000 home with $68,000 down, dropping the rate from 6.5% to 5.5% lowers principal and interest from $1,719.23 to $1,544.39, and the total payment from $2,180.89 to $2,006.05, a difference of about $175 a month.

That’s why your credit score matters when you buy a home: a better score can help you qualify for a better rate. See what a good credit score is for the ranges lenders look at. It’s also why the loan term matters; a shorter loan has a higher payment but much less interest, which we compare in 15-year vs. 30-year mortgage.

Your down payment

A bigger down payment lowers your loan amount and your monthly payment, and it can help you avoid extra costs:

• Less than 20% down on a conventional loan usually means paying private mortgage insurance. Our guide to what PMI is explains how it works and when you can remove it.
• More cash at closing means less cash left over. Don’t empty your savings to make a bigger down payment if it leaves you with no cushion.

If you’re still building your down payment, our guide on how to save for a big purchase shows how to set a monthly savings target.

Costs that don’t show up in the payment

A mortgage payment isn’t the whole cost of owning a home. Before you settle on a price, budget for:

• Closing costs: Lender fees, title charges, appraisal and prepaid items, due when you buy. Your Loan Estimate lists them.
• Maintenance and repairs: Roofs, water heaters and appliances all wear out, and you’re now the one paying.
• Utilities: A bigger home often means bigger heating, cooling and water bills.
• HOA dues: If the home has a homeowners association, its dues count toward your housing payment.
• Rising taxes and insurance: Both can increase over time, which raises your monthly payment if they’re paid through escrow.
• An emergency fund: You’ll still need savings after closing. See how much your emergency fund should be.

What a lender approves vs. what you’re comfortable with

Lender approval tells you the most you can borrow. It doesn’t know that you want to save for retirement, travel, or pay for child care. A good check is to build a monthly budget with the new housing payment in it, using your take-home pay, before you start touring homes. If the budget only works when everything goes right, consider a lower price.

How to boost what you can afford

1. Pay down other debt. Lowering a car or card payment directly improves your back-end ratio.
2. Improve your credit before applying, so you qualify for a better rate.
3. Save a larger down payment to reduce the loan amount and possibly avoid PMI.
4. Shop around. Get Loan Estimates from several lenders and compare the rates, fees and APRs.
5. Be flexible on location, size or condition. A slightly smaller home can make a large difference to your monthly budget.

The bottom line

To figure out how much house you can afford, start with your gross income, apply a conservative guideline like 28% for housing and 36% for all debt, and translate the lower payment into a home price using realistic rates, taxes and insurance. In our example, $8,000 a month in income and a $450 car payment support about $350,000 with 20% down at 6.5%. Then make sure the payment still fits your real budget, with room left for savings, repairs and the rest of your life.

This content is for educational purposes only and isn't financial advice. Calculator results are estimates based on the numbers you enter. For decisions about your situation, consider talking with a qualified professional. Read our full disclaimer.