How Much House Can I Afford? Real Numbers and Rules to Know

The 28/36 Rule: A Classic Starting Point

The most widely cited affordability guideline in personal finance is the 28/36 rule. It states that you should spend no more than 28% of your gross monthly income on housing costs and no more than 36% on all debt combined. These thresholds help ensure you have enough cash flow for savings, emergencies, and life expenses beyond your mortgage.

Here is how it works in practice. If your household earns $7,000 per month before taxes, your maximum monthly housing payment (including mortgage principal, interest, property taxes, and homeowner's insurance — often abbreviated as PITI) should be no more than $1,960. Your total debt load — housing plus car loans, student loans, and credit cards — should not exceed $2,520 per month.

At a 7% interest rate on a 30-year fixed mortgage, a $1,960 monthly principal and interest payment corresponds to a loan of roughly $295,000. Add a 10% down payment of about $33,000, and you could afford a home around $328,000. These numbers shift significantly as interest rates move.

What Lenders Actually Look At

Lenders use their own version of the affordability formula, centered on your debt-to-income ratio (DTI). Your front-end DTI is housing costs divided by gross income. Your back-end DTI is all monthly debt payments divided by gross income. Most conventional lenders cap back-end DTI at 43–45%, though some allow up to 50% with strong compensating factors like a large down payment or excellent credit.

Your credit score also directly affects how much house you can afford by influencing your interest rate. A borrower with a 760 credit score might get a 6.75% rate, while someone with a 640 score might face 7.75% on the same loan. On a $300,000 mortgage, that 1% difference adds roughly $190 per month and over $68,000 in total interest.

Lenders also verify income through W-2s, tax returns, and pay stubs. Self-employed borrowers often face more scrutiny and must show two years of stable self-employment income. Bonuses and overtime may only be counted if they have been consistent for two years.

Hidden Costs That Shrink Your Budget

Many first-time buyers focus only on the mortgage payment and forget the full cost of homeownership. Here are expenses beyond principal and interest that affect affordability:

• Property taxes: Vary widely by location. In New Jersey, effective rates average over 2%, adding $8,000+ per year on a $400,000 home. In Hawaii, effective rates average under 0.3%.
• Homeowner's insurance: Typically $1,000–$3,000 per year depending on home value, location, and coverage.
• Private mortgage insurance (PMI): Required on conventional loans when your down payment is under 20%. Costs 0.5–1.5% of the loan annually — on a $300,000 loan, that is $1,500–$4,500 per year.
• HOA fees: Condos and planned communities often charge $200–$600+ per month.
• Maintenance and repairs: Budget 1% of home value per year. A $350,000 home may need $3,500 annually on average for upkeep.

When you add these costs together, the true monthly cost of homeownership can easily be $500–$1,000 more than the mortgage payment alone.

A Real-World Example by Income Level

Here is how affordability breaks down at common income levels, assuming a 7% mortgage rate, 20% down payment, and moderate property taxes and insurance:

These are maximum estimates. Financial planners often recommend buying at 2–3x your annual income rather than stretching to the maximum. A household earning $100,000 might be most financially comfortable in a $250,000–$300,000 home rather than pushing to $350,000.