Just because you're approved for a certain amount doesn't mean you should borrow it all. This guide will help you determine what you can truly afford—not just what a bank will lend you.
Pre-Approval vs. Affordability
The 28/36 Rule Explained
Most lenders use the 28/36 rule to determine how much you can borrow. This is a conservative guideline that helps prevent you from becoming house-poor.
Front-End Ratio
Your monthly housing expenses (mortgage payment, property taxes, homeowners insurance, and HOA fees) should not exceed 28% of your gross monthly income.
Example:
Gross income: $7,000/month
28% = $1,960/month
Maximum housing payment: $1,960
Back-End Ratio
Your total monthly debt payments (housing + car loans + credit cards + student loans + any other debt) should not exceed 36% of your gross monthly income.
Example:
Gross income: $7,000/month
36% = $2,520/month
Maximum total debt: $2,520
Quick Calculation
Step-by-Step: Calculate Your Affordability
Step 1: Calculate Gross Monthly Income
Add up all sources of monthly income before taxes:
- •Salary/wages (divide annual by 12)
- •Bonuses (if guaranteed and documented)
- •Self-employment income (average of last 2 years)
- •Alimony, child support (if documented and continuing)
- •Rental income (75% of gross rental income)
Example:
Annual salary: $84,000 ÷ 12 = $7,000/month
Step 2: Calculate Monthly Debt Obligations
List all minimum monthly payments that appear on your credit report:
- •Credit card minimum payments
- •Auto loans
- •Student loans (even if deferred, some lenders count them)
- •Personal loans
- •Alimony/child support you pay
Example:
Car payment: $350
Student loan: $200
Credit card minimum: $50
Total monthly debt: $600
Step 3: Apply the 28/36 Rule
Using our example ($7,000/month income, $600/month debt):
Front-End Ratio (28%):
$7,000 × 0.28 = $1,960
Maximum monthly housing payment (mortgage + taxes + insurance + HOA)
Back-End Ratio (36%):
$7,000 × 0.36 = $2,520 (total debt allowed)
$2,520 - $600 (existing debt) = $1,920
Maximum monthly housing payment after accounting for other debts
🎯 Your Maximum Housing Payment:
Use the lower of the two numbers: $1,920/month
Step 4: Estimate Your Home Price
Now that you know your maximum monthly payment, work backwards to find your home price:
Assumptions for this example:
- • Maximum payment: $1,920
- • Property taxes: $200/month (2.4% annually)
- • Homeowners insurance: $100/month
- • HOA fees: $0
- • Down payment: 10% ($30,000)
- • Interest rate: 7%
Available for mortgage payment: $1,920 - $200 - $100 = $1,620/month
At 7% interest on a 30-year loan, $1,620/month = ~$243,000 loan amount
Estimated Home Price:
$270,000
(Loan $243,000 + Down payment $30,000 = $273,000, rounded to $270,000)
Use Our Calculator
Factors That Affect Your Affordability
📈Factors That Increase Buying Power
- ✓Higher credit score: Better rates = lower payments
- ✓Larger down payment: Smaller loan, avoid PMI
- ✓Low debt-to-income: More room for housing payment
- ✓Lower interest rates: Same payment buys more house
- ✓Area with low property taxes: Less of payment to taxes
📉Factors That Reduce Buying Power
- ✗Lower credit score: Higher rates = bigger payments
- ✗Existing debt: Car loans, credit cards limit housing budget
- ✗High property taxes: More goes to taxes, less to mortgage
- ✗HOA fees: Count toward housing expenses
- ✗Small down payment: PMI adds to monthly cost
Beyond the Bank's Approval: True Affordability
Lenders qualify you based on gross income, but you live on net income (after taxes). A comfortable payment depends on your entire financial picture.
Ask Yourself These Questions:
- 💭
Do I have an emergency fund?
Keep 3-6 months of expenses after your down payment. Don't drain savings.
- 💭
What are my other financial goals?
Retirement savings, kids' college, travel? A lower payment preserves flexibility.
- 💭
Is my income stable?
Commission-based or freelance? Build in a buffer for slower months.
- 💭
What are the hidden costs of homeownership?
Maintenance, repairs, utilities, landscaping—budget 1-2% of home value annually.
- 💭
How long do I plan to stay?
Buying is best if you'll stay 5+ years due to closing costs and appreciation time.
The Conservative Approach
Comparison: Different Scenarios
| Scenario | Income | Existing Debt | 28% Rule | 36% Rule | Max Payment | Est. Home Price |
|---|---|---|---|---|---|---|
| Single, No Debt | $60K/yr | $0 | $1,400 | $1,800 | $1,400 | $210K |
| Single, Car Loan | $60K/yr | $400 | $1,400 | $1,400 | $1,400 | $210K |
| Couple, No Debt | $100K/yr | $0 | $2,333 | $3,000 | $2,333 | $350K |
| Couple, Car + Student | $100K/yr | $800 | $2,333 | $2,200 | $2,200 | $330K |
| High Earner, High Debt | $150K/yr | $2,000 | $3,500 | $2,500 | $2,500 | $375K |
*Estimated home prices assume 10% down, 7% interest rate, 0.2% monthly property tax, $100 insurance. Your actual prices will vary based on location and loan terms.
Strategies to Increase Affordability
💳 Pay Down Debt
Every $100/month in debt you eliminate adds roughly $15,000-$20,000 to your buying power. Focus on high-payment debts first, especially if you can pay them off in 10-12 months before house hunting.
⬆️ Increase Your Credit Score
Improving your score from 650 to 740+ can lower your rate by 0.5-1.0%, saving you $50-$100+ per month. That's $15,000+ more in buying power. Pay bills on time, lower credit utilization, and fix errors on your credit report.
💰 Save a Bigger Down Payment
Going from 5% to 20% down eliminates PMI (saving $100-200/month) and gets you better rates. On a $300,000 home, that's an extra $45,000 saved, but it avoids ~$150/month in costs—huge for affordability.
👥 Co-Borrower
Adding a spouse, partner, or family member with income dramatically increases buying power. Two incomes of $50,000 each = $100,000 combined, roughly doubling what you can afford (if the co-borrower has minimal debt).
📍 Consider Different Locations
Property taxes vary wildly by location. A home in Texas might have 2.5% property tax ($625/month on $300K) vs. Hawaii at 0.3% ($75/month). That's $550/month difference— enough to afford an extra $80,000+ in home price in a lower-tax area.
First-Time Buyer Programs
Many states and cities offer first-time buyer programs with down payment assistance, lower rates, or tax credits. Common programs include:
- • FHA loans: 3.5% down with credit scores as low as 580
- • VA loans: 0% down for military members/veterans (no PMI!)
- • USDA loans: 0% down for rural/suburban properties
- • State housing authorities: Down payment grants or low-interest loans
Check with local housing agencies or your lender about programs in your area.
Common Mistakes to Avoid
- ❌Maxing out your approval: Just because you're approved for $400K doesn't mean you should buy a $400K house. Leave breathing room.
- ❌Forgetting closing costs: You need 2-5% of the purchase price at closing, separate from your down payment. On $300K, that's $6K-$15K.
- ❌Ignoring homeownership costs: Budget 1-2% of home value annually for maintenance. $300K home = $3K-$6K/year or $250-$500/month.
- ❌Not factoring in rate changes: If rates rise, your buying power drops. Get pre-approved early and lock rates when favorable.
- ❌Taking on new debt: Don't buy a car or furniture on credit before closing—it changes your DTI and could kill your approval.
Ready to Calculate?
Use our AI Mortgage Calculator to see exactly what you can afford based on your specific situation. Get instant results with detailed explanations.
Try the Calculator