How Much House Can I Afford?
Before you start touring open houses, it helps to know roughly what price range actually fits your budget. Lenders don't just look at how much you'd like to spend — they run your income, debts, and down payment through a fairly predictable formula. Once you understand that formula, you can estimate your own comfortable price range in a few minutes.
The Three Numbers Lenders Look At
Almost every mortgage approval boils down to three inputs: your gross monthly income, your existing monthly debt payments (car loans, student loans, credit cards, child support), and the size of your down payment. Lenders combine the first two into a debt-to-income ratio, then use your down payment to determine your loan amount and whether you'll need private mortgage insurance.
The 28/36 Rule Explained
A common guideline — sometimes called the 28/36 rule — suggests keeping your housing costs (principal, interest, taxes, and insurance) under 28% of your gross monthly income, and your total debt payments, including housing, under 36%. Some conventional loans allow total debt up to 43-50% in certain cases, but staying closer to 28/36 gives you more breathing room in your monthly budget.
For example, if your household earns $7,000 a month before taxes, 28% works out to a $1,960 monthly housing budget. Plug that number, along with your expected interest rate and loan term, into a mortgage calculator to see what home price it supports.
How Your Down Payment Changes the Math
A bigger down payment does three things at once: it lowers your loan amount, it lowers your monthly payment, and — once you cross the 20% threshold — it eliminates private mortgage insurance (PMI). PMI typically costs 0.3-1.5% of your loan amount per year, so avoiding it can meaningfully increase the home price you can afford within the same monthly budget.
Don't Forget the Hidden Costs of Homeownership
Your mortgage payment is only part of the picture. Property taxes, homeowners insurance, HOA fees, and ongoing maintenance (often estimated at 1-2% of home value per year) all add up. Underestimating these costs is one of the most common reasons new homeowners feel "house poor" even when their mortgage payment alone looked affordable on paper.
Putting It Together: A Quick Example
Say you have a $1,960 monthly housing budget, a $40,000 down payment, and can lock in a 6.5% rate on a 30-year loan. Run those numbers through the mortgage calculator to see the maximum home price that keeps your total payment — including estimated taxes, insurance, and PMI — inside your budget. Then check the amortization calculator to see how much of your early payments go toward interest versus principal.