Home Affordability: How Much House Can I Afford?
A new home is one of the most exciting purchases you'll make in your lifetime—but it's also one of the heftiest! Before setting out on your search for the perfect property, you’ll need to know how much house you can actually afford based on your current income level (and expenses) to avoid taking on massive debt. This article discusses just that.
Factors determining how much house you can afford
Coming up with a number can feel overwhelming but really only comes down to a few key things. Talk to a lender first and then examine your monthly income, all your expenses, and the amount of debt the lender believes you can manage. You’ll then use these numbers while taking everything into account to settle on what a comfortable mortgage payment looks like for you.
Monthly income
Your paycheck is a big piece of the puzzle of course, but don’t forget to include any side gigs or passive income too. The steadier your income, the more confident you’ll feel about your budget.
Monthly expenses
After nailing down your income number, add up all your monthly expenses. Include basics such as groceries, transportation, and cleaning supplies as well as bigger-ticket items like student loans and car payments.
Down payment
Think about your savings and how much you can put toward a down payment, knowing 20% is common. While some loans allow you to qualify for less, you’ll probably need to pay mortgage insurance in this case (which protects the lender if you can’t make your payments).
Cash reserves
Beyond your mortgage and down payment, don’t forget to budget for extra costs like closing fees, new furniture, and the inevitable home upgrades you’ll probably crave after moving in.
Type of mortgage
When it comes to mortgage types, consider this: Do you want a fixed-rate loan or an adjustable-rate loan? Lower rates often accompany the latter at first, but these can change later—ultimately increasing your monthly payment, so be sure you’re comfortable with that risk.
Credit Score
Your credit score matters, too. Most lenders set the threshold at 620 for mortgage approval; the higher your score, the better your chances of obtaining a lower rate.
A combination of all of these factors impacts the average monthly cost of your home (you can also check out our home affordability calculator for help in this department). Next, we’ll look at some key ratios lenders use to judge if you can manage your mortgage debt.
What is the 28/36 rule for buying a home?
The 28/36 rule is a simple guideline saying you should spend no more than 28% of your gross income on home-related costs like your mortgage, property taxes, homeowner’s insurance, and HOA fees: a great way to keep your budget in check while you house hunt. The second part of the rule—36%—covers your total monthly debt payments including your mortgage plus anything else you owe (e.g., credit cards, car loans, and student loans). The overall idea here is to keep all your debts, not just housing, at a manageable level.
28/36 rule example
Let’s break it down with an example. If you make $100,000 a year, the 28/36 rule says your mortgage shouldn’t be more than $2,333 a month ($28,000 divided by 12 months). Meanwhile, your total debt payments—including your mortgage, credit cards, and car loans—shouldn’t top $3,000 a month.
Both numbers matter. If you fall under 28% for housing but eclipse 36% for total debt, it’s perhaps smart to pay down some balances or look for a more affordable home. Keep in mind, the 28/36 rule is just a guideline; lenders sometimes allow higher ratios, depending on your credit and other factors. Sticking to this rule of thumb, however, can help avoid stretching your budget too thin and keep your finances healthy over the long term.
What is debt-to-income ratio?
Debt-to-income ratio (DTI) is a simple way to assess how much of your income goes toward your debts each month. To calculate this, add up all your monthly debt payments—such as your car loan, car payment, student loans, and credit cards—and divide that number by your gross monthly income.
Lenders use your DTI, along with your credit score, to figure out if you’re a good fit for a loan or mortgage; the lower your DTI, the better your chances of getting approved for a loan (generally). Most experts consider a "good" DTI one below 35%, but you’ll look that much more attractive to lenders if you can push yours even lower. Keep in mind different lenders have their own rules in this respect; some may follow the 28/36 rule or use different thresholds altogether.
DTI example
Here’s an example of how DTI works in real life: If you make $10,000 each month and your debt payments add up to $5,000, your DTI is 50%. That’s too high for most mortgages, given that most lenders want to see this number below 41–43%. If your DTI is higher than you’d like, don’t worry! You can work to get it lower by paying down credit card balances, making extra payments on your debts, and/or finding ways to increase your monthly income before applying for a loan.
My ratios seem fine: What’s my next move?
Before buying a home, it’s smart to understand the difference between mortgage interest rates and APRs. (The annual percentage rate (“APR”) includes both the interest rate and any extra fees, reflecting the real cost of borrowing.) Closing costs and lender fees can quickly add up, so be sure to factor those in, and use a simple spreadsheet to keep track of rates and fees from different lenders—credit unions, banks, even online platforms like Rocket Mortgage and SoFi. This will help you easily shop around and find the best deal.
When you’re ready to take the next step, get pre-approved by several lenders soyou know exactly how much you can borrow; the variance between offers might surprise you! Just remember: lenders sometimes approve homebuyers for an amount higher than they’re comfortable with, so be sure to stick to a budget that feels right for you.
FHA loans: what you need to know
An FHA loan is a government-backed mortgage designed to make homeownership more accessible—particularly relevant for first-time buyers or those with a lower credit score or limited savings for a down payment. Unlike conventional loans that often require 20% down, FHA loans let you get started with much less upfront. You can choose a 15-year or 30-year fixed-rate FHA loan, and there are also adjustable-rate options if you want more flexibility with your payments. FHA-approved lenders can walk you through the application process if you qualify. Just make sure to compare FHA loans with other options—like conventional, VA, USDA, or jumbo loans—so you can find the best fit for your financial situation.
The biggest drawback to FHA loans
FHA loans are popular because they’re more accessible, but there’s a catch: you’ll need to pay mortgage insurance in two parts. First, there’s an upfront fee of 1.75% of your total loan amount. Then, you’ll pay an annual mortgage insurance premium (MIP), split into monthly payments, ranging from 0.45% to 1.05% depending on your loan terms. This is different from private mortgage insurance (PMI) you’d pay with a conventional loan when your down payment is less than 20%.
If you make a bigger down payment with a conventional loan, you might avoid PMI altogether, which can save you money in the long run. However, FHA mortgage insurance sticks around for the life of the loan if your down payment is under 10%, so it’s important to factor in these extra costs when budgeting for your home. Always keep these additional expenses in mind—they can have a real impact on your monthly payment and overall budget.
In sum: how much mortgage you can afford
You might qualify for a mortgage that doesn’t really fit your budget, or you could get turned down for a loan you know you can handle. Here’s the thing: lenders have strict rules to protect themselves from risky loans. But you can use that same mindset for your own finances. Don’t stretch yourself too thin with a mortgage that leaves you living paycheck to paycheck. Focus on what’s truly affordable for you, not just what a lender says you can borrow.
Have questions about the home buying process? Schedule a free consultation with one of our CFP® professionals to get them answered or check our home buying content hub.
FAQs
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Irrespective of how much you make, aim to keep your housing costs (mortgage, property taxes, homeowner’s insurance, and HOA fees) to no more than 28% of your gross income. Therefore, if your annual gross salary is $80,000, you should spend no more than $22,400 a year (or $1,867 a month) on housing expenses.
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A standard guideline is to set aside 1–3% of your home's value each year for maintenance and repairs. If your home is worth $500,000, for example, you should save between $5,000 and $15,000 annually. While this may seem like a significant amount, costs can escalate quickly when issues such as a broken furnace, leaky roof, or faulty appliance pop up.
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Closing costs usually range from 2% to 5% of the home’s purchase price and include loan fees, title insurance, appraisal costs, and taxes. Lenders provide a loan estimate early on in the process and a closing disclosure prior to closing with the final numbers.
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With job loss ranking among the most common factors driving home foreclosures, an emergency savings cushion—a minimum of 3 to 6 months' worth of expenses, ideally up to 12 months' worth—can help cover monthly payments and necessary repairs in case you or your spouse find yourself in this boat.
About the author
The content in this post was developed by our team of writers and reviewed by our team of CFP® professionals here at Vision Retirement.
Retirement Planning | Tax Preparation | Investment Management
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Vision Retirement is an independent registered advisor (RIA) firm headquartered in Ridgewood, New Jersey. Launched in 2006 to better help people prepare for retirement and feel more confident in their decision-making, our firm’s mission is to provide clients with clarity and guidance so they can enjoy a comfortable and stress-free retirement. Schedule a no-obligation consultation with one of our financial advisors today!
Disclosures:
This document is a summary only and is not intended to provide specific advice or recommendations for any individual or business.
