How Much House Can I Afford? The Real Math Behind Home Affordability
The 28/36 Rule: Your Starting Framework
The 28/36 rule is the gold standard for home affordability. It says your total housing costs should stay under 28% of gross monthly income, and your total debt payments (housing + all other debts) should stay under 36%.
Worked Example
| Input | Amount |
|---|---|
| Gross annual income | $90,000 |
| Gross monthly income | $7,500 |
| 28% of gross monthly | $2,100 (max housing payment) |
| Existing monthly debts (car + student loans) | $500 |
| 36% of gross monthly | $2,700 (max total debt) |
| Max housing payment (36% rule) | $2,700 − $500 = $2,200 |
| Binding constraint | $2,100/month (lower of the two) |
With a $2,100/month housing budget, 10% down, 7% mortgage rate, and estimated taxes and insurance, you can afford roughly a $300,000–$330,000 home. At a 6% rate, that stretches to about $340,000–$370,000. Rate differences matter enormously.
The True Cost of Homeownership
Your mortgage payment is just the beginning. The total cost of owning a home includes several recurring expenses that many first-time buyers underestimate.
| Cost Category | Typical Amount | Notes |
|---|---|---|
| Mortgage (P&I) | Varies by rate and term | Use a fixed rate for predictability |
| Property taxes | 0.5–2.5% of home value/year | Varies dramatically by state and county |
| Homeowners insurance | $1,500–$3,000/year | Higher in disaster-prone areas |
| PMI (if <20% down) | 0.5–1.5% of loan/year | Drops off at 80% LTV (conventional) |
| Maintenance & repairs | 1–2% of home value/year | Budget for this — it’s not optional |
| HOA fees (if applicable) | $200–$500+/month | Check for special assessments |
| Utilities | $200–$400/month | Larger homes cost more to heat/cool |
What Lenders Look At vs What You Should Look At
| Factor | Lender’s Perspective | Your Perspective |
|---|---|---|
| DTI ratio | Up to 43–50% is approvable | Keep under 36%, ideally under 30% |
| Reserves | 2 months minimum | 6+ months emergency fund, untouched |
| Maintenance costs | Not considered | Budget 1–2% of home value annually |
| Retirement savings | Not considered | Don’t sacrifice 401(k) contributions for a bigger house |
| Lifestyle spending | Not considered | Leave room for travel, hobbies, kids’ activities |
How Your Down Payment Affects Affordability
A larger down payment reduces your loan amount, monthly payment, and total interest paid. It also eliminates PMI at 20% or more. But don’t drain every account to hit 20% down — maintaining cash reserves and continuing to invest matters more than avoiding PMI.
PMI on a conventional loan typically costs 0.5–1.5% of the loan amount per year and automatically cancels when you reach 80% LTV. On a $300,000 loan, that’s $125–$375/month — meaningful but temporary. Run the numbers: sometimes putting 10% down and keeping cash invested earns more than the PMI costs.
Key Takeaways
- Follow the 28/36 rule: housing under 28% of gross income, total debt under 36%.
- Lenders approve more than you should spend — their maximum DTI (43–50%) leaves no room for savings or life.
- Budget 1–2% of home value per year for maintenance on top of your mortgage, taxes, and insurance.
- Don’t sacrifice retirement contributions or drain your emergency fund for a bigger down payment.
- Stress-test your budget: if you can’t handle the payment + $500/month for unexpected costs, buy less.
Frequently Asked Questions
How much income do I need to buy a $400,000 house?
With 10% down ($40,000), a $360,000 loan at 7% over 30 years costs about $2,395/month in principal and interest. Add taxes (~$400), insurance (~$200), and PMI (~$250), and your total PITI is roughly $3,245. At the 28% rule, you’d need at least $11,589/month gross income, or about $139,000/year.
Should I buy the most expensive house I’m approved for?
Almost never. Lender approval maximums assume every dollar above minimum debt payments goes to housing. They don’t account for retirement savings, maintenance, emergencies, or quality of life. Buy at 70–80% of your approved amount to maintain financial flexibility.
How do interest rates affect what I can afford?
Dramatically. On a $300,000 loan over 30 years, the difference between 6% and 7% is about $200/month — or $72,000 over the loan’s life. A 1% rate increase reduces your purchasing power by roughly 10%. When rates are high, buying a less expensive home and refinancing later is a valid strategy.
Does my spouse’s income count toward affordability?
If both spouses are on the mortgage application, both incomes count. However, both credit scores matter too — the lender uses the lower of the two middle scores for pricing. If one spouse has poor credit, it may be better to apply with only the higher-scoring spouse (using only that income for qualification).
Should I pay off debt before buying a house?
Pay off high-interest debt (credit cards) first — it improves your DTI ratio and credit score. For lower-rate debts (student loans, car payments), it depends. If paying them off would drain your down payment savings, the math may favor keeping the debt and buying sooner. Run both scenarios through the 28/36 framework.