Determining how much house you can afford is one of the most important steps in the home buying process. Buy more than you can comfortably handle and you'll find yourself house-poor—unable to enjoy life because every dollar goes toward your mortgage. Underestimate your budget and you might miss out on the home that would have been perfect for your family.
The challenge is that what a lender says you can afford and what you can actually afford are often two very different numbers. Banks make money by lending money, so they're incentivized to approve you for as much as possible. Your job is to figure out what makes sense for your life—not just your loan application.
Understanding Home Affordability
When a lender evaluates your mortgage application, they're looking at a combination of factors: your gross income (before taxes), your existing debt obligations, your credit history, and how much cash you can put down. They'll run these numbers through their formulas and tell you the maximum loan amount you qualify for.
But here's what they won't consider: whether you want to take vacations, how much you spend on hobbies, if you're planning to start a family, or whether you enjoy eating out three times a week. They don't factor in your retirement savings goals or the fact that your car has 150,000 miles on it and will need replacing soon. Those are your concerns, and they should directly influence how much house you actually buy.
The goal isn't to find the maximum mortgage you can qualify for—it's to find a home that lets you live the life you want while building equity and long-term wealth.
The 28/36 Rule: A Time-Tested Framework
Financial advisors have been using the 28/36 rule for decades, and it remains one of the most reliable guidelines for determining home affordability. The rule has two parts, each designed to keep your finances healthy.
The first part, the 28% rule, says that your monthly housing costs shouldn't exceed 28% of your gross monthly income. This includes your mortgage principal and interest, property taxes, homeowner's insurance, any HOA fees, and private mortgage insurance if applicable. When lenders talk about your "PITI" (principal, interest, taxes, and insurance), this is what they mean.
The second part, the 36% rule, takes a broader view. It says your total debt payments—housing costs plus car loans, student loans, credit card minimums, and any other debt obligations—shouldn't exceed 36% of your gross monthly income. You can check where you stand with our DTI calculator. This ensures you're not overextended even when you account for all your financial responsibilities.
Let's put some real numbers on this. If you earn $80,000 per year, your gross monthly income is about $6,667. Under the 28% rule, your maximum housing payment would be around $1,867. Under the 36% rule, your total debt payments shouldn't exceed $2,400. So if you have a $400 car payment and $200 in student loans, you'd need to keep your housing costs at $1,800 or below to stay within the 36% guideline.
These rules aren't arbitrary—they're based on decades of data showing that borrowers who exceed these thresholds are significantly more likely to default on their mortgages or experience financial distress.
The Variables That Shape Your Budget
Interest rates might be the single biggest factor affecting how much home you can afford, yet they're largely outside your control. When rates are low, your monthly payment on a $300,000 mortgage might be $1,610. When rates climb just two percentage points higher, that same loan costs $2,201 per month—a difference of $591 that could easily push you outside the 28% guideline. Learn more about how rates work in our mortgage rates guide.
What you can control is your credit score, and it has an outsized impact on the rate you'll receive. Borrowers with scores above 760 typically qualify for the best rates, while those in the 620-680 range might pay half a percentage point more—or even a full point higher. Over 30 years on a $300,000 loan, that difference could cost you $60,000 or more in additional interest.
Your down payment matters too, and not just because it affects how much you need to borrow. Put down less than 20% and you'll pay private mortgage insurance, adding another $150 to $300 to your monthly costs. A larger down payment also often qualifies you for better interest rates, since lenders view you as a lower-risk borrower. Use our down payment calculator to see how different amounts affect your payment.
Location plays a surprising role in affordability. Property taxes in New Jersey average over 2% of home value, while in Hawaii they're under 0.3%. Insurance costs vary dramatically as well—coastal Florida homes might cost five times more to insure than similar homes in the Midwest. Two identical homes at the same price could have monthly costs that differ by hundreds of dollars depending on where they're located. Compare costs across regions with our state comparison tool.
Putting It All Together
Start by calculating 28% of your gross monthly income. This is your maximum total housing cost, not just your mortgage payment. From this number, subtract estimated property taxes (typically 1-2% of home value annually, divided by 12), homeowner's insurance (usually $100-200 per month), and any HOA fees. What remains is available for your mortgage principal and interest.
Use our mortgage calculator to work backward from this payment amount to determine your maximum loan size at current interest rates. Then add your down payment to get your maximum purchase price.
For example, if you can afford $1,800 per month in total housing costs and estimate $350 for taxes and insurance, you have $1,450 available for principal and interest. At a 7% interest rate, that supports a loan of about $218,000. Add a $50,000 down payment, and your maximum purchase price is around $268,000.
Remember that you'll also need cash for closing costs (typically 2-5% of the loan amount) and moving expenses. Don't drain your entire savings for the down payment—you'll want reserves for unexpected repairs and emergencies.
The Costs Nobody Warns You About
First-time buyers are often shocked by how much it costs to own a home beyond the mortgage payment. The general rule is to budget 1-2% of your home's value annually for maintenance—that's $3,000 to $6,000 per year for a $300,000 home. Some years you'll spend less, but then the HVAC system dies or the roof needs replacing, and you'll spend much more.
Utilities typically run higher than renters expect. You're now paying to heat and cool a larger space, maintain a yard, and keep more rooms lit. Water bills include irrigation. If there's a pool or septic system, those require ongoing maintenance too.
Then there are the less obvious costs: furnishing empty rooms, buying a lawn mower, replacing appliances that the previous owners took, and all the little things that add up when you're responsible for everything from light bulbs to roof shingles. Plan for these expenses so they don't blow your budget in year one.
Some financial experts suggest an even more conservative approach than the 28/36 rule. The 25% rule recommends keeping housing costs to 25% of your take-home pay (after taxes), which builds in more cushion. The "3x rule" suggests buying a home priced at no more than three times your annual income. These aren't official lending guidelines, but they've helped many homeowners avoid becoming house-poor.
Ready to see where you stand? Our affordability calculator can help you determine your comfortable price range, and our first-time buyer's guide walks you through the entire purchasing process.
Use Our Affordability Calculator
Frequently Asked Questions
Using the 28% rule, you can afford about $1,167/month for housing costs. At current rates, this typically translates to a home price of $150,000-$200,000, depending on your down payment, interest rate, location, and other debts.
With a $100,000 salary, the 28% rule suggests a maximum of $2,333/month for housing. This could support a home price of roughly $350,000-$450,000, depending on your down payment and other factors.
Generally, no. Just because you qualify for a certain amount doesn't mean you should spend it. Consider your lifestyle, other financial goals (retirement, travel, kids), and leave room for unexpected expenses.
Minimum down payments vary: Conventional loans (3%), FHA (3.5%), VA and USDA (0%). However, putting 20% down eliminates PMI and gives you a lower payment and more equity.
You're ready if you have stable income, good credit (620+), savings for down payment and closing costs plus an emergency fund, a manageable debt-to-income ratio, and plan to stay in the area for at least 5 years.