Before you start browsing listings and falling in love with dream kitchens, you need to answer the most important question in real estate: how much house can you actually afford? Getting this number wrong can lead to years of financial stress, while getting it right sets the foundation for confident, comfortable homeownership.
The 28/36 Rule: Your Starting Point
Most lenders follow the 28/36 rule when evaluating borrowers. This guideline says your monthly housing costs (mortgage principal, interest, taxes, and insurance) should not exceed 28% of your gross monthly income, and your total monthly debt payments should stay below 36% of your gross monthly income.
For example, if your household earns $90,000 per year ($7,500/month), your maximum housing payment would be around $2,100/month under the 28% guideline, and your total debts (including car loans, student loans, and credit cards) should stay under $2,700/month.
Factors That Determine Your Buying Power
1. Your Gross Income
Lenders look at your pre-tax income, including salary, bonuses, commissions, rental income, and other documented earnings. If you are buying with a partner, both incomes count. Self-employed borrowers typically need two years of tax returns to verify their income.
2. Your Down Payment
The more you put down, the more house you can afford and the better your loan terms will be. A 20% down payment eliminates private mortgage insurance (PMI), which can save you $100 to $300 per month on a typical loan. However, many programs allow as little as 3% to 3.5% down.
3. Your Credit Score
Your credit score directly impacts the interest rate you receive. A borrower with a 760+ score might qualify for a rate 0.5% to 1% lower than someone with a 660 score. On a $350,000 loan, that difference can mean over $100/month in extra interest payments.
4. Your Existing Debts
Car payments, student loans, credit card minimums, and other obligations reduce the amount lenders are willing to give you. Paying down debt before applying can significantly increase your buying power. Use our DTI calculator to see exactly where you stand.
5. Interest Rates
Even a small rate change has a large impact. At 6.5%, a $300,000 mortgage costs $1,896/month. At 7.0%, the same loan costs $1,996/month. That is $100/month or $36,000 over the life of the loan.
How to Calculate Your Affordable Price
- Calculate 28% of your gross monthly income. This is your maximum housing payment.
- Subtract estimated property taxes and insurance. A reasonable estimate is 1.5% of the home value per year for taxes and $1,200 to $2,400 per year for insurance.
- Subtract PMI if your down payment is under 20%. Budget roughly 0.5% to 1% of the loan amount per year.
- The remaining amount is available for principal and interest. Use a mortgage calculator to determine the loan size that fits this payment.
Hidden Costs Most Buyers Forget
The purchase price is just the beginning. Make sure to account for:
- Closing costs: Typically 2% to 5% of the purchase price. Learn more in our closing costs guide.
- Moving expenses: Budget $1,000 to $5,000 depending on distance.
- Immediate repairs or upgrades: New locks, paint, and appliances can add up quickly.
- Furniture and decor: Especially if you are moving from a smaller space.
- HOA fees: Can range from $100 to $500+ per month in some communities.
Use Our Free Affordability Calculator
Skip the guesswork and get a personalized estimate in under two minutes. Our affordability calculator factors in your income, debts, down payment, credit score, and local tax rates to give you a realistic price range. It also shows you monthly payment breakdowns so you know exactly where your money goes.
What If You Cannot Afford Enough?
If the numbers do not add up for the home you want, you have several options:
- Increase your down payment by saving aggressively or tapping gift funds from family.
- Pay down existing debt to improve your DTI ratio.
- Improve your credit score to unlock better interest rates.
- Explore down payment assistance programs that could give you thousands in grants or forgivable loans.
- Consider a less expensive area or look into affordable home listings.
The most important thing is to be honest with yourself about what you can comfortably afford. A home should provide security and stability, not financial anxiety. Take the time to run the numbers, use our tools, and talk to a lender before committing to a price range.