How Much House Can You Afford? A Complete Guide

Buying a home is the largest financial commitment most people make. Before you start browsing listings and attending open houses, you need a realistic answer to a fundamental question: how much can you actually afford? The answer depends on your income, existing debts, down payment savings, interest rates, and the ongoing costs of homeownership that go far beyond the mortgage payment. This guide walks you through the formulas lenders use, shows you how to calculate your own affordability range, and highlights hidden costs that can turn a comfortable purchase into a financial stretch.

The 28/36 Rule Explained

The 28/36 rule is the most widely referenced guideline in mortgage lending. It provides two separate thresholds that together define a safe borrowing range. While not a law, most conventional lenders use these ratios as their starting point for determining how much you can borrow.

Front-End Ratio (28%)

The front-end ratio, also called the housing ratio, states that your total monthly housing expense should not exceed 28% of your gross monthly income. Housing expense includes your mortgage principal and interest, property taxes, homeowners insurance, PMI (if applicable), and HOA fees. For example, if your household earns $8,000 per month before taxes, your maximum housing payment under this rule is $2,240.

Back-End Ratio (36%)

The back-end ratio, or total debt-to-income ratio, caps your combined monthly debt payments at 36% of gross income. This includes your housing payment plus all other recurring debt obligations: car payments, student loans, credit card minimum payments, personal loans, and child support. Using the same $8,000 monthly income, your total debt payments should stay below $2,880, meaning if you already pay $640 per month toward other debts, your maximum housing payment drops to $2,240.

Some loan programs allow higher ratios. FHA loans permit back-end ratios up to 43% in many cases, and some conventional programs with strong compensating factors (high credit score, large reserves, or significant down payment) may approve ratios up to 45% or even 50%. However, just because a lender will approve a higher ratio does not mean that level of debt is financially comfortable.

How Lenders Determine Your Maximum Loan

Understanding the lender's process helps you prepare and set realistic expectations before applying.

Income Verification

Lenders verify your income using W-2 forms, tax returns (usually two years), recent pay stubs, and bank statements. Self-employed borrowers typically need two years of business tax returns and a year-to-date profit and loss statement. Only stable, documentable income counts toward your qualification. Overtime, bonuses, and commission income may be included if you have a two-year history of receiving them. Lenders average variable income over 24 months to establish a reliable baseline.

Debt-to-Income Calculation

Your lender pulls your credit report and tallies every monthly obligation that appears. This includes minimum credit card payments (even if you pay the full balance each month, the minimum is used), auto loan payments, student loan payments (income-driven repayment amounts are typically used for federal loans), personal loans, and any other installment or revolving debt. Utilities, insurance premiums (other than homeowners), subscriptions, and groceries do not count. The lender then calculates both front-end and back-end ratios to determine the maximum mortgage payment you can carry.

Step-by-Step Affordability Calculation

Here is how to calculate your own affordability range using the 28/36 rule. Suppose your household earns $96,000 per year and you have $750 per month in existing debt payments.

Step 1 — Calculate gross monthly income. $96,000 / 12 = $8,000 per month.

Step 2 — Apply the front-end ratio. $8,000 × 0.28 = $2,240 maximum housing payment.

Step 3 — Apply the back-end ratio. $8,000 × 0.36 = $2,880 maximum total debt. Subtract existing debts: $2,880 − $750 = $2,130 maximum housing payment.

Step 4 — Use the lower number. The back-end ratio is more restrictive here, so $2,130 is your maximum PITI payment.

Step 5 — Subtract non-mortgage housing costs. Estimate property taxes ($325/month), insurance ($160/month), and PMI ($120/month if putting less than 20% down). That leaves $2,130 − $325 − $160 − $120 = $1,525 for principal and interest.

Step 6 — Convert to a loan amount. At a 6.5% rate over 30 years, $1,525 per month supports a loan of approximately $241,400. With a 10% down payment, that translates to a home price of about $268,200.

Real-World Affordability Scenarios

Single Income Earner

Rachel earns $65,000 per year ($5,417/month gross) and has a $300 car payment and $250 in student loans. Using the 28% rule, her maximum housing payment is $1,517. The 36% rule gives $1,950 total debt capacity; after subtracting her $550 in existing debts, that leaves $1,400 for housing. Taking the lower number ($1,400) and subtracting $275 for taxes, $140 for insurance, and $105 for PMI, she has $880 for principal and interest. At 6.5% over 30 years, this supports a loan of about $139,300. With 5% down, Rachel can afford a home around $146,600.

Dual-Income Household

James and Olivia earn a combined $140,000 ($11,667/month). Their only debt is a $450 car payment. The 28% rule sets their housing maximum at $3,267. The 36% rule allows $4,200 in total debt; minus the $450 car payment, that leaves $3,750. The front-end ratio is more restrictive at $3,267. Subtracting $400 for taxes, $185 for insurance, and no PMI (they plan to put 20% down), they have $2,682 for principal and interest. At 6.5%, that supports a $425,000 loan. With 20% down, they can comfortably afford a $531,000 home.

High-Debt Buyer

Kevin earns $85,000 ($7,083/month) but carries $1,800 in monthly debt payments including student loans ($800), a car loan ($500), and credit card minimums ($500). The 28% rule allows $1,983 for housing. The 36% rule permits $2,550 in total debt; minus his $1,800 in existing obligations, only $750 remains for housing. After subtracting taxes ($200), insurance ($130), and PMI ($80), Kevin has just $340 for principal and interest, supporting a loan of only about $53,800. Kevin's high existing debt dramatically limits his buying power, illustrating why paying down debt before buying is so important.

Hidden Costs Beyond the Mortgage

Your mortgage payment is just one piece of the homeownership puzzle. Failing to budget for these additional expenses is one of the most common mistakes first-time buyers make.

Closing costs typically range from 2% to 5% of the loan amount. On a $300,000 loan, expect to pay $6,000 to $15,000 in lender fees, title insurance, appraisal, and other settlement charges. These are due at closing, separate from your down payment.

Maintenance and repairs average 1% to 2% of the home value per year. On a $350,000 home, budget $3,500 to $7,000 annually for everything from HVAC servicing to roof repairs.

Utilities in a house are typically higher than in an apartment. Expect $200 to $400 per month for electricity, gas, water, sewer, and trash collection, depending on home size and location.

Furnishing and move-in costs are often underestimated. A larger home may need additional furniture, window treatments, appliances, and landscaping equipment. Budget $5,000 to $15,000 for the transition.

Emergency reserves should cover 3 to 6 months of all living expenses, including your mortgage payment. Do not drain your savings to maximize your down payment.

How to Increase Your Buying Power

If the numbers show you can afford less than you hoped, several strategies can expand your range.

Pay down existing debt. Every $300 in monthly debt you eliminate adds roughly $47,500 in mortgage capacity at a 6.5% rate. Prioritize paying off car loans, credit cards, or personal loans before applying.

Boost your credit score. Moving from a 680 to a 740 score can lower your interest rate by 0.25% to 0.5%, which translates to thousands of dollars in savings and a higher affordable price.

Increase your down payment. A larger down payment reduces or eliminates PMI, freeing that portion of your budget for a larger loan. It also improves your loan-to-value ratio, which can help you secure a better rate.

Consider a longer loan term. A 30-year mortgage has lower monthly payments than a 15-year or 20-year term, allowing you to qualify for a larger loan amount. You can always make extra payments later to pay it off faster.

Look in areas with lower property taxes. Since property taxes directly reduce the amount available for principal and interest, a lower-tax area can significantly increase the home price you can afford.

Explore down payment assistance programs. Many state and local programs offer grants or low-interest loans for first-time buyers. These can supplement your savings and reduce or eliminate the need for PMI.

Affordability by Income Level

The following table provides rough estimates of home affordability at various income levels, assuming a 6.5% rate, 30-year term, 10% down payment, $500/month in existing debts, average property taxes (1.1%), and standard insurance costs. These are starting estimates; your actual numbers will vary.

Keep in mind that these estimates assume moderate existing debt. If you have no other debts, your buying power increases significantly. Conversely, high existing debt obligations can dramatically reduce these numbers, as Kevin's scenario demonstrated above.

Common Mistakes to Avoid

Using take-home pay instead of gross income. Lender ratios are based on gross (pre-tax) income, not net. Using net income in your calculations will underestimate what lenders will approve, though basing your personal budget on net income is actually more conservative and recommended.

Ignoring future expenses. If you plan to start a family, change careers, or go back to school in the next few years, factor that reduced income or increased expense into your affordability calculation now.

Depleting savings for the down payment. Putting every available dollar toward a down payment may get you into a slightly more expensive home, but it leaves you vulnerable to any unexpected expense. Keep at least three months of living costs in reserve after closing.

Overlooking property tax variation. Two homes at the same price in different counties can have vastly different property tax bills. Always research local tax rates before assuming a home fits your budget.

Relying solely on the lender's maximum. The maximum loan amount a lender approves does not account for your retirement savings goals, children's education funds, vacation spending, or the lifestyle you want to maintain. Treat the lender's maximum as a ceiling, not a target.

Last updated: February 23, 2026