Home Affordability: How Much House Can I Afford?
Quick reference
6 Home Affordability Rules of Thumb
28%
Housing-to-income
Keep all housing costs (P&I, taxes, insurance, HOA) at or below 28% of gross income.
36%
Total debt-to-income
Keep all debts combined (housing + cards + loans) at or below 36% of gross income.
1–3%
Annual maintenance
Budget 1–3% of home value per year for upkeep. A $500K home = $5K–$15K/yr.
2–5%
Closing costs
2–5% of purchase price covers loan fees, title insurance, appraisal, and taxes.
3–12
Months of emergency savings
At least 3–6 months of expenses set aside — ideally up to 12 — before stretching for a home.
620+
Minimum credit score
Common threshold for mortgage approval. Higher scores unlock lower rates.
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.
Key Takeaways
- Your budget for buying a home boils down to your monthly income and expenses, down payment and cash reserves, mortgage type, and credit score.
- The 28/36 rule is a helpful guideline; keep housing costs under 28% of your gross income and all debt payments combined under 36%.
- Lenders also weigh your debt-to-income ratio (DTI): monthly debt payments divided by gross monthly income. Aim for under 35%, knowing most lenders cap it around 41–43%.
- A 20% down payment lets you skip private mortgage insurance (PMI); FHA loans require less upfront but carry their own mortgage insurance often through the life of the loan.
- Lenders may approve you for more than you're comfortable paying; seek a pre-approval from several, then stick to a budget that genuinely fits your life.
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 in Action
Example: a household earning $100,000/year ($8,333/month gross).
Starting point
$100,000
Gross annual income
28%
Housing cap
Total housing costs
Mortgage + property taxes + homeowner’s insurance + HOA fees combined.
Max housing payment
$2,333
per month
$100,000 × 28% ÷ 12 months
36%
Total debt cap
All monthly debt payments
Housing plus credit cards, car loans, student loans, and any other debt.
Max total debt payments
$3,000
per month
$100,000 × 36% ÷ 12 months
Both numbers matter
If you’re under 28% on housing but over 36% on total debt, pay down balances first — or look for a more affordable home.
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 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 so you 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
FHA Loan vs. Conventional Loan
| FHA Loan | Conventional Loan | |
|---|---|---|
| Best for | First-time buyers, lower credit scores, smaller down payments | Buyers with stronger credit and a 20%+ down payment |
| Minimum down payment | As low as 3.5% | 3–5% minimum, but 20%+ avoids PMI |
| Credit score requirements | More lenient — often 580+ | Stricter — typically 620+ for approval, higher for best rates |
| Mortgage insurance | MIP: 1.75% upfront + 0.45–1.05% annual (split monthly) | PMI: required only if down payment is under 20% |
| How long the insurance lasts | Life of the loan if down payment is under 10% | Drops off once you reach 20% equity |
| Loan terms available | 15- or 30-year fixed; adjustable-rate options | 15-, 20-, or 30-year fixed; adjustable-rate options |
FHA loans lower the barrier to entry. Conventional loans cost less over time if you can put down 20% and clear credit thresholds. Run both scenarios before deciding.
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 0.15% to 0.75% 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.
Reviewed for accuracy
Paul Muller, AEP®, CFP®
Founder and Relationship Manager at Vision Retirement, with 30+ years in the financial industry.
Read full bio →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.
Disclosures:
This document is a summary only and is not intended to provide specific advice or recommendations for any individual or business.
