How Much House Can I Afford? The Simple Formula

Buying a home is the biggest financial decision most people ever make. Yet most buyers don't know their actual budget until they sit down with a lender — often too late. Here's how to calculate exactly how much house you can afford before you ever step foot in an open house.

The 28/36 Rule: The Foundation

Lenders use the 28/36 rule as a guideline. It says your monthly housing costs should not exceed 28% of your gross monthly income, and your total debt payments (housing + all loans) should not exceed 36%.

Example: If you earn $6,000/month gross, your max housing payment is $6,000 × 0.28 = $1,680. Your total debt (housing + car + student loans) should stay under $6,000 × 0.36 = $2,160.

What's Included in Your Housing Payment?

Your monthly mortgage payment isn't just principal and interest. Lenders calculate PITI:

• Principal — the amount you borrowed, being paid down
• Interest — the cost of borrowing (the bulk of early payments)
• Taxes — property taxes, usually 1-2% of home value annually
• Insurance — homeowner's insurance, typically $100-200/month
• PMI — if your down payment is under 20%, add 0.5-1% of loan annually
• HOA fees — if applicable, can be $100-500+/month

How Your Down Payment Changes Everything

On a $400,000 home with a 7% interest rate (30-year loan):

• 3.5% down ($14,000): Payment ~$2,800/mo, including PMI
• 10% down ($40,000): Payment ~$2,580/mo, including PMI
• 20% down ($80,000): Payment ~$2,395/mo, no PMI

That 20% down payment eliminates PMI and saves $200-400/month — $72,000+ over the life of the loan. But saving for 20% can take years. The right down payment depends on your situation.

Your Debt-to-Income Ratio (DTI): What Lenders Actually Check

DTI = Total monthly debt payments ÷ Gross monthly income. Most conventional loans require DTI under 43-45%. FHA loans allow up to 50% in some cases.

Hidden Costs First-Time Buyers Miss

1. 1Closing costs: 2-5% of loan amount ($8,000-$20,000 on a $400K home)
2. 2Moving costs: $1,000-$5,000 depending on distance
3. 3Immediate repairs and upgrades: budget $5,000-$15,000
4. 4Ongoing maintenance: 1-2% of home value per year
5. 5Utility increases: bigger house = bigger bills

The Comfortable vs Maximum Budget

Just because a lender approves you for $500,000 doesn't mean you should spend $500,000. That's the maximum they'll lend — not what's comfortable for your life. Build in margin for job loss, medical emergencies, or a growing family.

Many financial advisors recommend targeting 2.5-3x your annual household income. If you earn $100,000/year, aim for $250,000-$300,000 in home price, not the $450,000 a bank might approve you for.