How Much House Can You Really Afford? A Complete Affordability Guide

The Most Important Question in Home Buying

"How much house can I afford?" is the first question every prospective homebuyer should ask. The answer involves more than just qualifying for a mortgage—it's about finding a price range that fits comfortably within your overall financial picture.

What Lenders Look At: The Qualifying Ratios

Mortgage lenders use two primary ratios to determine how much you can borrow:

1. Front-End Ratio (Housing Ratio)

This ratio compares your monthly housing costs to your gross monthly income. Housing costs include:

Principal and interest (P&I)
Property taxes
Homeowners insurance
HOA fees (if applicable)
Private mortgage insurance (PMI)

Standard limit: 28% of gross monthly income

Example: If you earn $8,000/month gross:

Maximum housing payment = $8,000 × 0.28 = $2,240/month

2. Back-End Ratio (Debt-to-Income / DTI)

This ratio compares your total monthly debt payments to your gross monthly income. Total debt includes:

Housing costs (from above)
Car payments
Student loans
Credit card minimum payments
Personal loans
Child support/alimony

Standard limit: 36-43% of gross monthly income (varies by loan type)

Example: Same $8,000/month income:

Maximum total debt payments = $8,000 × 0.36 = $2,880/month
If you have $500/month in other debt, maximum housing = $2,380/month

The 28/36 Rule Explained

The 28/36 rule is a widely-used guideline stating:

Spend no more than 28% of gross income on housing
Spend no more than 36% of gross income on total debt

This conservative rule helps ensure you have money left for savings, emergencies, and quality of life.

When You Might Exceed These Ratios

Some loan programs allow higher ratios:

FHA loans: Up to 31/43
VA loans: No front-end limit, back-end up to 41
Conventional with strong compensating factors: Up to 50% DTI

Compensating factors include:

High credit score (740+)
Large down payment (20%+)
Significant cash reserves
Stable employment history

Factors That Determine Your Budget

1. Income

Lenders prefer stable, documented income:

W-2 employees: 2 years of employment history
Self-employed: 2 years of tax returns
Bonus/commission: Must be consistent over 2 years

2. Down Payment

Your down payment directly affects:

Loan amount: Higher down payment = lower mortgage
Monthly payment: Lower loan = lower payment
PMI requirement: 20%+ down eliminates PMI
Interest rate: Better rates with larger down payments

3. Credit Score

Credit scores affect mortgage rates significantly:

| Credit Score | Approximate Rate | Monthly Payment ($300K) | |--------------|------------------|-------------------------| | 760+ | 6.5% | $1,896 | | 700-759 | 6.75% | $1,946 | | 660-699 | 7.0% | $1,996 | | 620-659 | 7.5% | $2,098 |

The 620-659 borrower pays $200+ more monthly than the 760+ borrower—that's $72,000+ over 30 years!

4. Interest Rates

Every 1% rate increase reduces buying power by approximately 10%:

At 6%: $300,000 mortgage = $1,799/month
At 7%: Same payment affords only $270,000
At 8%: Same payment affords only $245,000

5. Property Taxes and Insurance

These vary dramatically by location:

Property taxes: 0.5% to 2.5% of home value annually
Insurance: $1,000 to $5,000+ annually

A $400,000 home might have:

Low-tax area: $167/month in taxes
High-tax area: $833/month in taxes

This $666/month difference significantly impacts affordability.

Hidden Costs of Homeownership

When calculating affordability, don't forget:

One-Time Costs

Closing costs (2-5% of purchase price)
Moving expenses
Initial repairs/updates
Furniture and appliances

Ongoing Costs

Maintenance (budget 1-2% of home value annually)
Utilities (often higher than renting)
Landscaping
HOA fees
Future repairs (roof, HVAC, appliances)

The True Cost Example

For a $350,000 home with 10% down:

Monthly mortgage (P&I at 7%): $2,095 Property taxes: $350 Insurance: $150 PMI: $150 Total PITI: $2,745

Additional monthly costs:

Utilities: $250
Maintenance reserve: $290
HOA: $100 (if applicable)

True monthly cost: $3,385+

What Can You Actually Afford vs. What You Qualify For

Here's a crucial distinction: what you qualify for and what you can comfortably afford are often different numbers.

Qualification Example

Income: $100,000/year ($8,333/month) Other debts: $400/month 43% DTI limit: $3,583/month for all debt Available for housing: $3,183/month

This might qualify you for a $450,000+ home.

Comfortable Affordability Example

Using more conservative 28% rule: Maximum housing: $2,333/month

This suggests a home around $350,000.

The "Sleep Well at Night" Test

Ask yourself:

Could I afford this if I lost my job for 6 months?
Will I still be able to save for retirement?
Can I handle a major repair without going into debt?
Will I have money left for vacations and entertainment?

If the answer is no, you're buying too much house.

Strategies to Afford More Home

Increase Your Budget

Improve credit score – Higher score = lower rate = more buying power
Pay down debt – Lower DTI = higher qualification amount
Save larger down payment – More down = smaller loan
Wait for lower rates – Timing can add significant buying power

Reduce What You Need

Consider different areas – Taxes and prices vary by location
Look at smaller homes – Square footage isn't everything
Consider fixer-uppers – Sweat equity can build value
Explore different loan types – FHA, VA, USDA offer advantages

The 5-Year Rule

Financial advisors often recommend the "5-year rule": only buy if you plan to stay at least 5 years. This allows time for:

Transaction costs to be offset by appreciation
Equity to build through payments
Market fluctuations to even out

Conclusion

Determining how much house you can afford requires balancing what lenders will approve with what genuinely fits your financial life. Use the 28/36 rule as a starting point, factor in all ownership costs, and leave room for life's other priorities.

Use our affordability calculator to run your specific numbers and see exactly what price range makes sense for your situation. Remember: a home should be a foundation for building wealth, not a source of financial stress.