How to Calculate How Much House You Can Afford
Learn the 28/36 rule, DTI ratio, and step-by-step method to calculate your home budget. Includes down payment, closing costs, and real affordability examples.
Key Takeaways
- The 28/36 rule is your baseline: housing costs shouldn't exceed 28% of gross monthly income; total debt shouldn't exceed 36%.
- Pre-approval amounts overstate affordability — lenders ignore property taxes, insurance, maintenance, and your actual lifestyle needs.
- Down payment size directly impacts affordability — 20% eliminates PMI; anything less adds $100–$300/month in insurance costs.
- Interest rates swing your buying power by tens of thousands — a 1% difference on a $300,000 mortgage costs ~$200/month or $72,000 over 30 years.
- You need a written budget that accounts for taxes, insurance, HOA fees, and 1% annual maintenance before you make an offer.
The 28/36 Rule: Your Starting Point for Home Affordability
The 28/36 rule is the industry standard lenders use, and it's your first filter for how to calculate how much house you can afford. Here's what it means:
- 28% rule: Your monthly housing payment (mortgage principal, interest, property taxes, and homeowners insurance) should not exceed 28% of your gross monthly income.
- 36% rule: Your total monthly debt payments — including the mortgage, car loans, student loans, credit cards, and any other liabilities — should not exceed 36% of gross monthly income.
Example: You earn $60,000 annually, or $5,000 per month gross. Under the 28% rule, your housing payment should not exceed $1,400/month. Under the 36% rule, your total debt (including that $1,400 mortgage) should not exceed $1,800/month. If you already carry $300/month in student loan payments, you have only $1,500 left for a mortgage payment.
This rule is not a law — it's a lending guideline. Some lenders will go higher (up to 43% DTI for qualified borrowers), and some borrowers with excellent credit and large down payments may qualify for lower thresholds. But 28/36 is where to start your math.
The rule works because it's conservative. It leaves room for property taxes and insurance (which vary by location), and it ensures you're not overleveraged if your income drops or an emergency hits.
Calculate Your Maximum Home Price Using the DTI Method
Debt-to-income ratio (DTI) is the metric lenders actually use to set your loan amount. Here's how to work backward from your income to a home price.
Step 1: Calculate your maximum housing payment.
Multiply your gross monthly income by 0.28.
- Gross monthly income: $5,000
- Maximum housing payment: $5,000 × 0.28 = $1,400/month
Step 2: Estimate property taxes and insurance.
This varies wildly by location. Property taxes range from under 0.5% of home value annually (Hawaii) to over 2% (New Jersey). Homeowners insurance averages $1,200–$1,800/year nationally but can be higher in coastal or high-risk areas.
Use your county assessor's website for local tax rates. For insurance, get quotes from at least three carriers once you've identified a specific property or neighborhood.
Example for a $250,000 home in a mid-tax state (1.2% annual tax rate):
- Annual property tax: $250,000 × 0.012 = $3,000/year = $250/month
- Homeowners insurance: $1,500/year = $125/month
- Combined: $375/month
Step 3: Back out taxes and insurance from your housing budget.
$1,400 (max housing payment) − $375 (taxes + insurance) = $1,025/month for mortgage principal and interest
Step 4: Use a mortgage calculator to find the loan amount.
Plug in:
- Monthly payment: $1,025
- Interest rate: Current rates (as of early 2026, typical rates are 6–7% for a 30-year fixed; check Freddie Mac's Primary Mortgage Market Survey for current rates)
- Loan term: 30 years
At 6.5% interest over 30 years, $1,025/month buys you approximately $175,000 in loan amount.
Step 5: Add your down payment.
If you have $50,000 saved for a down payment, your maximum home price is roughly $175,000 + $50,000 = $225,000.
If you put down only 5% ($11,250), you'd be financing $213,750 of a $225,000 home — and you'd add PMI (private mortgage insurance) of roughly $150–$200/month, which pushes your actual payment over your 28% threshold.
Step-by-Step: Finding Your Actual Affordable Price Range
The math above gives you a lender's number. Your actual affordable price is lower, because lenders ignore costs you must pay.
Create a complete monthly housing budget.
| Cost Category | Example Amount |
|---|---|
| Mortgage (principal + interest) | $1,025 |
| Property tax | $250 |
| Homeowners insurance | $125 |
| PMI (if down payment < 20%) | $150 |
| HOA fees (if applicable) | $200 |
| Utilities (electric, gas, water) | $150 |
| Maintenance (1% of home value ÷ 12) | $200 |
| Total monthly housing cost | $2,100 |
In this example, a $1,025 mortgage payment actually costs you $2,100/month once you account for everything. That's 42% of a $5,000 gross monthly income — above the 36% debt limit if you carry any other debt.
To stay within 28/36, you'd need to reduce the mortgage payment to ~$1,000, which drops your affordable home price to roughly $210,000 (depending on down payment and rates).
The real question: Can you actually afford this?
Beyond the 28/36 math, ask yourself:
- Do you have 6 months of housing costs in emergency savings? For the $2,100/month home above, that's $12,600. Most homeowners don't, and one major repair (roof, HVAC, foundation) can cost $5,000–$15,000.
- Can you maintain your current lifestyle? If housing takes 42% of gross income, you have 58% left for food, transportation, insurance, childcare, retirement savings, and discretionary spending. For a $5,000/month earner, that's $2,900. Is that enough?
- What if rates rise or you lose income? A job loss, illness, or reduced hours can make an "affordable" house unaffordable fast.
Down Payment, Closing Costs, and Hidden Expenses Most Buyers Overlook
Down payment size directly affects affordability.
| Down Payment % | Amount on $250K Home | PMI? | Monthly PMI Cost |
|---|---|---|---|
| 3% | $7,500 | Yes | $200–$250 |
| 5% | $12,500 | Yes | $150–$200 |
| 10% | $25,000 | Yes | $100–$150 |
| 15% | $37,500 | Yes | $50–$100 |
| 20% | $50,000 | No | $0 |
PMI (private mortgage insurance) is mandatory if you put down less than 20%. It protects the lender, not you, and typically costs 0.5–1.5% of the loan amount annually. On a $225,000 loan, that's $1,125–$3,375/year, or $94–$281/month.
Many first-time buyers focus only on the down payment and ignore PMI. That extra $150/month can disqualify you from a loan or force you to buy a cheaper home.
Closing costs: 2–5% of the loan amount.
On a $225,000 home purchase, closing costs typically run $4,500–$11,250. These include:
- Loan origination fee (0.5–1%)
- Appraisal ($400–$600)
- Title search and insurance ($500–$1,000)
- Home inspection ($300–$500)
- Attorney fees (varies by state, $500–$1,500)
- Property taxes and insurance (prorated at closing)
Most buyers don't budget for closing costs separately. If you're putting 5% down ($12,500) and closing costs are $7,000, you actually need $19,500 in liquid savings — not $12,500.
Ongoing costs most buyers underestimate.
- Maintenance and repairs: Industry standard is 1% of home value annually. A $250,000 home needs $2,500/year ($208/month) set aside. Roofs fail, water heaters burst, and HVAC systems die.
- Property taxes increase: Reassessments happen; rates change. Budget 3–5% annual increases in high-growth areas.
- Homeowners insurance isn't fixed: After a claim, your rate can jump 20–40%. Coastal homes face rising premiums due to climate risk.
- HOA fees (if applicable): Can range from $100–$500+/month. Some HOAs raise fees 5–10% annually.
How Debt, Credit Score, and Interest Rates Affect What You Can Borrow
Your credit score directly determines your interest rate.
As of early 2026, here's how credit scores map to mortgage rates (rates fluctuate daily; these are approximate):
| Credit Score | Typical Interest Rate | Monthly Payment on $225K Loan |
|---|---|---|
| 740+ | 6.0–6.25% | $1,349 |
| 700–739 | 6.25–6.5% | $1,363 |
| 660–699 | 6.5–7.0% | $1,391 |
| 620–659 | 7.0–7.5% | $1,419 |
| Below 620 | 7.5%+ or denied | $1,450+ |
A 1% rate difference costs roughly $200/month on a $225,000 loan. Over 30 years, that's $72,000 in extra interest.
If your credit score is below 640, you may not qualify for a conventional loan. FHA loans (backed by the Federal Housing Administration) accept scores as low as 580, but require 3.5% down and charge mortgage insurance for the life of the loan.
Existing debt reduces your borrowing power.
The 36% DTI rule includes all debt. If you earn $5,000/month and already carry $400/month in car loans and student loans, you have only $1,400 left for a mortgage payment (36% of $5,000 = $1,800; $1,800 − $400 = $1,400).
Before you apply for a mortgage, pay down high-interest debt. Eliminating a $300/month car payment frees up $300/month in mortgage capacity — which translates to roughly $50,000 more in home buying power (assuming 6.5% rates).
Lenders verify income, but don't verify sustainability.
A lender will approve you based on your current income, but won't ask: Can you actually afford this if your income drops 20%? That's your job.
If you're self-employed, freelance, or commission-based, lenders typically average your income over 2 years and may require tax returns, profit-and-loss statements, and bank statements. This can reduce your approved amount by 10–20% compared to a W-2 employee.
Common Mistakes: Why Lenders' Pre-Approval Isn't Your Real Budget
Pre-approval is a marketing tool, not a spending limit.
When a lender pre-approves you for $400,000, that's the maximum they'll lend based on debt ratios and income verification. It is not a recommendation for what you should spend.
Lenders have no incentive to keep you financially healthy long-term. They make money on the loan origination fee and interest, regardless of whether you're house-poor afterward.
Pre-approval ignores your lifestyle and savings goals.
A lender's pre-approval includes only:
- Your income
- Your existing debt
- Your credit score
- Standard property tax and insurance estimates
It does not include:
- Your actual property taxes (which vary by neighborhood)
- Your actual homeowners insurance (which varies by home age and location)
- Your other living expenses (food, childcare, transportation)
- Your retirement savings goals
- Your emergency fund needs
- Planned life changes (kids, job transitions, aging parents)
Example: You're pre-approved for $350,000 and buy a home at that price. Your monthly housing cost is $2,100 (after taxes and insurance). You earn $6,000/month gross. That leaves $3,900 for everything else — which sounds fine until you realize you want to save $500/month for retirement, set aside $200/month for car maintenance, and have $500/month for childcare. Suddenly, your actual discretionary budget is $2,700/month for food, utilities, insurance, and emergencies. You're stressed.
The "house poor" trap.
Being house-poor means your housing costs are so high that you can't save, invest, or handle emergencies. It's the #1 financial mistake homebuyers make. You avoid it by using the 28/36 rule as a maximum, not a target, and building a complete budget that includes everything you actually spend.
Affordability Tools: Calculators vs. Working With a Mortgage Professional
Online calculators are useful but limited.
Free tools like Bankrate's mortgage calculator, NerdWallet's affordability calculator, and the CFPB's mortgage estimate tool let you plug in income, down payment, and rates to see an estimated home price. They're good for a quick sanity check.
Limitations: They typically use national average property tax rates (around 1.1%) and insurance costs ($1,200/year), which may be far off for your location. A home in New Jersey (2.5% property tax) or Texas (1.8%) will have very different true affordability than the calculator assumes.
Mortgage pre-approval from a lender is more accurate but still not your budget.
When you apply for pre-approval with a bank, credit union, or mortgage broker, they'll verify your income, pull your credit report, and check your debts. They'll give you a pre-approval letter stating the maximum loan amount.
What to do with it: Use the pre-approval amount as a ceiling, not a target. Then do the full budget math above (taxes, insurance, maintenance, utilities) to find your actual comfortable price range, which will be lower.
Working with a mortgage broker or loan officer.
A mortgage professional can:
- Help you understand local property tax and insurance costs upfront
- Explain loan options (conventional, FHA, VA, USDA) and which fits your situation
- Identify down payment assistance programs you may qualify for
- Lock in a rate and protect you from rate changes during the purchase process
Cost: Most mortgage brokers are paid by the lender (via origination fees), not by you directly. However, some brokers charge an upfront fee (1–2% of loan amount). If you're comparing, always ask about all fees in writing.
Red flag: If a lender or broker pushes you toward the maximum pre-approval amount without discussing your full budget, find someone else. A good professional will help you find an affordable home, not just an approvable one.
Frequently Asked Questions
What is the 28/36 rule for home affordability?
The 28/36 rule means your housing payment shouldn't exceed 28% of gross monthly income, and total debt (including the mortgage) shouldn't exceed 36%. For a $5,000/month income, max housing payment is $1,400/month. This rule is a lending standard, not a law, but it's a solid baseline for affordability.
How much house can I afford on a $60,000 salary?
On a $60,000 salary ($5,000/month), you can typically afford a home priced $180,000–$220,000, depending on your down payment, interest rates, and existing debt. Using the 28/36 rule with a 6.5% interest rate and 10% down payment, you'd qualify for roughly $175,000 in financing, plus your down payment.
What's the difference between pre-approval amount and what I can actually afford?
Lenders pre-approve based on maximum debt capacity (28/36 ratio), not your lifestyle. You may qualify for $400,000 but only comfortably afford $300,000 after accounting for property taxes, insurance, maintenance (1% annually), utilities, and your savings goals. Pre-approval ignores these real costs.
Does my credit score affect how much house I can afford?
Yes, significantly. A 740+ credit score typically qualifies for 6.0–6.25% interest rates; a 620 score may face 7.0%+ rates. A 1