How Much House Can You Afford?
Determining how much house you can afford involves more than just looking at your income. Lenders, and more importantly, your financial wellbeing, depend on balancing your housing costs with other expenses and financial goals.
This calculator uses industry-standard debt-to-income ratios to estimate what you can afford while maintaining financial stability.
The 28/36 Rule
Most lenders use the 28/36 rule to determine how much you can borrow:
28% Front-End Ratio (Housing)
Your monthly housing costs (mortgage payment, property taxes, insurance, HOA) should not exceed 28% of your gross monthly income.
Example: With $7,000/month income, housing should be under $1,960.
36% Back-End Ratio (Total Debt)
Your total monthly debt payments (housing + car + student loans + credit cards) should not exceed 36% of gross income.
Example: With $7,000/month income, total debt under $2,520.
Some Lenders Go Higher
What's Included in Housing Costs
Your total monthly housing cost (often called PITI) includes:
| Component | Typical Range | Notes |
|---|---|---|
| Principal & Interest | Largest portion | Based on loan amount and rate |
| Property Taxes | 1-2% annually | Varies dramatically by location |
| Homeowners Insurance | $100-300/mo | Depends on home value and location |
| PMI | 0.5-1% of loan | Required if down payment < 20% |
| HOA Fees | $0-500+/mo | Common in condos, planned communities |
Don't Forget the Hidden Costs
Factors That Affect How Much You Can Afford
Your Income
- Lenders verify 2 years of employment history
- Self-employed? Expect more documentation
- Bonus/commission income may be averaged or excluded
- Income must be stable and likely to continue
Your Existing Debts
- Car payments
- Student loans (even if deferred)
- Credit card minimum payments
- Alimony or child support
- Other loan payments
Pay Down Debt First?
Your Credit Score
| Credit Score | Impact |
|---|---|
| 760+ | Best rates, easiest approval |
| 700-759 | Good rates, minor adjustments |
| 620-699 | Higher rates, more scrutiny |
| Below 620 | May need FHA or specialized lenders |
Your Down Payment
More down payment = more house for the same monthly payment, plus no PMI at 20%+.
Interest Rates
A 1% rate difference significantly affects buying power:
| Rate | Payment on $300K loan | Buying Power* |
|---|---|---|
| 6.0% | $1,799 | $315,000 |
| 6.5% | $1,896 | $300,000 |
| 7.0% | $1,996 | $285,000 |
| 7.5% | $2,098 | $271,000 |
*Home price for same ~$1,900 P&I payment
Affordability Rules of Thumb
| Rule | Formula | Example ($100K income) |
|---|---|---|
| Home Price = 2-3× Income | Conservative guideline | $200K-$300K |
| Home Price = 4-5× Income | More common today | $400K-$500K |
| 28% Housing | Monthly income × 0.28 | $2,333/month max |
| 36% Total Debt | Monthly income × 0.36 | $3,000/month max |
These Are Starting Points
The True Cost of Homeownership
Beyond mortgage payments, budget for:
- Maintenance and repairs (1-4% of value annually)
- Utilities (often higher than renting)
- Lawn care and landscaping
- Furniture and household items
- Appliance replacements
- Emergency fund for major repairs
A general rule: if your mortgage payment is $2,000, budget at least $2,400-2,500 for total housing costs.
Location Matters
Property taxes and insurance vary dramatically by location:
| Location Type | Property Tax | Insurance |
|---|---|---|
| Low-tax states (NV, HI, AL) | 0.3-0.5% | Varies |
| Average states | 0.8-1.2% | ~$1,500/yr |
| High-tax states (NJ, IL, NH) | 1.5-2.5% | Varies |
| Flood/hurricane zones | Any | +$2,000-5,000/yr |
Research Local Costs
Should You Buy or Rent?
Buying isn't always better than renting. Consider:
- How long will you stay? (5+ years generally favors buying)
- Are home prices likely to appreciate in your area?
- Can you afford the full costs of ownership?
- Would investing your down payment earn more?
- Do you value flexibility to move?
The 5% Rule
Frequently Asked Questions
Q: How much income do I need for a $400K house?
A: Using the 28% rule and assuming 6.5% rate with 20% down: you'd need about $95,000-100,000 annual income. With less down or higher rates, you'd need more.
Q: Should I max out what I'm approved for?
A: Generally no. Approval amounts often reflect the maximum, not what's comfortable. Leave room for savings, emergencies, and lifestyle. Many buyers are happiest spending 20-30% below their max.
Q: How do I lower my DTI ratio?
A: Pay off existing debts (especially car loans), increase your income, avoid new credit, or consider a less expensive home. Even small changes can help.
Q: What if my credit score is low?
A: FHA loans accept scores as low as 580 (3.5% down) or 500 (10% down). Work on improving your score before buying if possible — it saves money long-term.
Q: Do lenders count overtime or bonus income?
A: Usually yes, but only if it's consistent (2+ year history). They typically use an average. Irregular income may be excluded or discounted.
Q: How much should I save for closing costs?
A: Budget 2-5% of the home price. On a $400K home, that's $8,000-$20,000 in addition to your down payment. Some costs can be negotiated with the seller.
Steps Before You Buy
- Check your credit score and fix any errors
- Pay down high-interest debt
- Save for down payment AND closing costs AND emergency fund
- Get pre-approved to know your real budget
- Research property taxes and insurance in your target area
- Look at homes 10-20% below your max approval
- Don't make major financial changes during the buying process
- Get a quality home inspection before closing
This calculator provides estimates based on industry guidelines. Actual approval depends on lender requirements, credit history, and property factors. Consult a mortgage professional for personalized advice.