Before you fall in love with a listing, it pays to answer one question honestly: how much house can you actually afford? The number a lender will approve you for and the number that keeps your budget comfortable are often two different things. This guide walks through the rules lenders use, the costs buyers routinely underestimate, and how to land on a price that fits your real life — not just your maximum.
Start With the 28/36 Rule
Most lenders evaluate affordability using two debt-to-income (DTI) ratios, summarized as the 28/36 rule:
- The front-end ratio (28%): Your total monthly housing payment — principal, interest, property taxes, and insurance (PITI) — should stay at or below 28% of your gross monthly income.
- The back-end ratio (36%): All your monthly debt payments combined — housing plus car loans, student loans, credit card minimums, and child support — should stay at or below 36% of gross monthly income.
On a $7,000/month gross income, the 28% guideline puts your target housing payment around $1,960, and the 36% guideline caps total debt near $2,520. Some loan programs stretch these limits — FHA loans can allow back-end ratios above 43%, and strong credit or reserves can push approvals higher — but a payment that fits the classic rule is far less likely to leave you house-poor.
The Down Payment Changes Everything
Your down payment affects not just the loan size but your monthly cost in two ways. A larger down payment means borrowing less, and crossing the 20% threshold lets you avoid private mortgage insurance (PMI), which typically runs 0.3%–1.5% of the loan amount per year.
That said, you do not need 20% to buy. Conventional loans go as low as 3% down, FHA loans require 3.5%, and VA and USDA loans can require nothing down for those who qualify. The trade-off is a higher monthly payment and, in most cases, mortgage insurance until you build enough equity. Putting less down to keep cash in reserve is often the smarter move for first-time buyers — just budget for the added insurance cost.
Don’t Forget the Costs Beyond the Mortgage
The principal-and-interest figure a calculator spits out is only part of the monthly picture. Build a realistic budget around the full cost of ownership:
- Property taxes: Vary widely by state and county, often 0.5%–2%+ of the home’s value per year.
- Homeowners insurance: Required by lenders; budget several hundred to a couple thousand dollars annually depending on location and coverage.
- PMI: Applies when you put down less than 20% on a conventional loan.
- HOA dues: Condos and many planned communities charge monthly fees that lenders count against your DTI.
- Maintenance and repairs: A common rule of thumb is to set aside roughly 1% of the home’s value each year for upkeep.
- Closing costs: Typically 2%–5% of the loan amount, paid up front at closing.
A home that looks affordable on principal and interest alone can become a stretch once taxes, insurance, and upkeep are stacked on top. Run the full number before you commit.
How Your Credit Score and Rate Factor In
Your interest rate has an outsized effect on what you can afford. Even a half-point difference in rate can change your monthly payment by well over a hundred dollars on a typical loan — and tens of thousands over the life of the mortgage. A stronger credit score generally earns a lower rate, which in turn raises the price you can comfortably carry. If your score is on the bubble, a few months spent paying down balances and avoiding new credit can meaningfully expand your budget.
Get Preapproved Before You Shop
A mortgage preapproval gives you a lender-verified price range based on your actual income, debts, and credit — not a guess. It also signals to sellers that you are a serious, qualified buyer, which matters in competitive markets. Preapproval is the difference between knowing your number and hoping for it.
The Bottom Line
Affordability is about more than the largest loan you can qualify for. Use the 28/36 rule as a starting point, factor in your down payment and the full cost of ownership, and leave yourself breathing room for savings, emergencies, and the life you want to live in the home. The right price is the one that still feels comfortable when the property tax bill arrives.
Disclaimer: This article is for informational purposes only and does not constitute financial or lending advice.
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