How Much House Can I Afford?
What a lender will approve and what you can comfortably afford aren't always the same. Here's how lenders use your income and debts, what goes into a monthly housing payment, common affordability rules, and how to set a budget you can live with.
By Pond.com editors Updated 2 min read
Quick answer
- A common guideline is to keep housing costs under about 28% of gross monthly income and total debt payments under about 36%.
- Your monthly payment includes principal, interest, property taxes and homeowners insurance, plus PMI and HOA fees if they apply.
- Lenders may approve more than you're comfortable spending, so set your own limit.
- Budget for maintenance, often 1% to 2% of the home's value a year, plus utilities.
- Getting preapproved shows what a lender will offer and makes your offers stronger.
Before you start touring homes, it helps to know your price range. The amount a lender will approve is one number; the amount you can comfortably afford while still saving and living your life is another. Aim for the second.
What goes into your monthly payment
Your mortgage payment is often called PITI:
- Principal: paying down the loan
- Interest: the cost of borrowing
- Taxes: property taxes, often collected monthly into escrow
- Insurance: homeowners insurance
Plus, if they apply:
- PMI or FHA mortgage insurance with a smaller down payment
- HOA or condo fees
How lenders decide
Lenders look mainly at your debt-to-income ratio (DTI): your monthly debt payments divided by your gross (before-tax) monthly income.
A common guideline is the 28/36 rule:
- Housing costs under about 28% of gross monthly income
- Total debt (housing plus car loans, student loans, credit cards) under about 36%
Some loan programs allow higher ratios, but higher isn't always comfortable.
Example: with a gross income of $90,000 a year ($7,500 a month):
- 28% for housing = about $2,100 a month
- 36% total debt = about $2,700 a month, so with a $400 car payment, housing should stay near $2,100 or less
What else affects your price range
- Interest rate: small differences change the payment a lot.
- Down payment: more down means a smaller loan and payment. See how to save for a down payment.
- Property taxes and insurance vary widely by state and area.
- Credit score: better scores get better rates. See how credit scores work.
Costs lenders don't count
- Maintenance and repairs, often budgeted at 1% to 2% of the home's value a year
- Utilities, often higher than in an apartment
- Furniture, lawn care and commuting changes
- Savings goals like retirement and an emergency fund
Set a budget you can live with
- Start with your take-home pay, not gross income.
- Subtract your other bills, savings goals and everyday spending. See how to make a budget.
- What's left is a realistic ceiling for housing plus maintenance.
- Get preapproved so you know your loan options, then shop below your limit.
Common questions
Lower is better. Many lenders prefer a total debt-to-income ratio of 36% or less, though some loan programs allow higher ratios, sometimes up to about 43% to 50%, depending on credit and other factors.
Not necessarily. Approval is based on a lender's formulas, not your full budget. Consider other goals like retirement saving, childcare and travel, and leave room for repairs and rising costs.
A lot. A higher rate raises your monthly payment for the same loan, which lowers the price you can afford. Improving your credit score and comparing lenders can get you a better rate.