How Much House Can I Afford? The Rules Lenders Use

Before you fall in love with a listing, it helps to know what price range actually works for your finances. Lenders use a few standard ratios to decide how much they will lend. Knowing them lets you set a realistic budget, and decide whether to aim below the maximum you are offered.

The 28/36 rule

The traditional guideline is:

Spend no more than 28% of gross monthly income on housing: mortgage principal and interest, property tax, homeowners insurance, HOA dues and PMI.
Spend no more than 36% on all debt payments combined, including housing, car loans, student loans and credit card minimums.

Many conventional loans now allow a total debt-to-income ratio of 43–45%, and up to 50% with strong credit and savings. FHA loans can go higher still. These are maximums, not recommendations.

A worked example

Take a household earning $100,000 a year, or $8,333 a month, with a $400 car payment and $40,000 saved for a down payment.

28% of income allows $2,333 a month for housing.
36% allows $3,000 for all debt; minus the $400 car payment leaves $2,600 for housing.
The lower figure, $2,333, is the limit.

At a 6.5% mortgage rate, 1.1% property tax and $1,500 a year insurance, that supports a home of about $340,000. Using the more generous 43% limit would stretch the budget to over $400,000, but with much less room for saving and surprises.

The down payment trade-off

Putting down 20% avoids private mortgage insurance and lowers the payment. But draining all your savings for a bigger down payment can leave you without an emergency fund. Many first-time buyers put down 5–10%, accept PMI for a few years, and keep cash in reserve. PMI can usually be removed once you reach 20% equity.

Costs lenders do not count

Lender ratios ignore several real costs of owning a home:

Maintenance and repairs: budget 1–2% of the home's value a year. A $340,000 house means $3,400–6,800.
Utilities: a larger home costs more to heat and cool.
Closing costs: typically 2–5% of the price, paid at purchase.
Furnishing and moving.
Retirement saving and childcare, which compete for the same income.

A simple stress test

Before committing, ask: could we still make the payment if one income fell by 20%, or if we faced a $5,000 repair? If the answer is no, aim lower. A comfortable mortgage gives you freedom; a stretched one makes every other financial goal harder.

Next steps

Check your debt-to-income ratio with the DTI calculator.
Use the house affordability calculator to find your price range.
Model specific homes with the mortgage calculator, including tax and insurance.
Get pre-approved so sellers take your offer seriously.