How to Calculate What You Can Afford

Understanding Home Affordability

Before house hunting, it's crucial to know how much home you can realistically afford. Lenders use specific formulas to determine this.

The 28/36 Rule

This is the gold standard for mortgage qualification:

28% Rule: Housing costs shouldn't exceed 28% of gross monthly income
36% Rule: Total debt payments shouldn't exceed 36% of gross monthly income

Example Calculation

If you earn $6,000/month gross:

Maximum housing payment: $1,680 (28%)
Maximum total debt: $2,160 (36%)
If you have $400 in other debts, housing limit is $1,760

What's Included in Housing Costs?

Your monthly housing payment includes:

P: Principal (loan repayment)
I: Interest (cost of borrowing)
T: Taxes (property taxes)
I: Insurance (homeowners insurance)
PMI: Private mortgage insurance (if under 20% down)
HOA: Homeowner association fees (if applicable)

Front-End vs Back-End Ratio

Front-End Ratio (Housing Ratio)

Housing payment ÷ Gross monthly income = Should be ≤ 28%

Back-End Ratio (Debt-to-Income Ratio)

(Housing + All debts) ÷ Gross monthly income = Should be ≤ 36%

Other Debts Included

Credit card minimum payments
Car loans
Student loans
Personal loans
Child support/alimony

Exceptions to the Rule

Some loan programs allow higher ratios:

FHA loans: Up to 31/43
VA loans: More flexible, focus on residual income
Jumbo loans: May require lower ratios (25/35)

Factors That Affect Affordability

1. Income

Salary/wages
Bonuses (if consistent)
Commission
Self-employment income
Investment income

2. Credit Score

Better scores = lower rates = higher affordability

760+: Best rates
700-759: Good rates
660-699: Average rates
620-659: Higher rates
Below 620: Limited options

3. Down Payment

3.5%: FHA minimum
5-10%: Conventional with PMI
20%: No PMI, best rates
25%+: Jumbo loan options

4. Interest Rate

Every 0.5% rate increase reduces buying power by about 5%

5. Debt Obligations

Paying off debts increases how much house you can afford

Real-World Affordability

While lenders approve you for a maximum amount, consider:

Future expenses (kids, education)
Job stability
Savings goals
Lifestyle preferences
Emergency fund needs
Home maintenance costs

The 25% Conservative Rule

Some experts recommend keeping housing costs under 25% of take-home (not gross) pay for more financial flexibility.

Hidden Costs of Homeownership

Budget for these on top of your mortgage:

Maintenance: 1% of home value annually
Utilities: $200-400/month
Landscaping: $50-200/month
Repairs: Emergency fund needed
Improvements: Optional but common

Improving Your Affordability

Increase income (raise, promotion, side hustle)
Pay off debts
Save larger down payment
Improve credit score
Consider less expensive areas
Look for homes needing less work

Use Our Affordability Calculator

Input your income, debts, and down payment to see exactly how much home you can afford based on lender guidelines.