Buying a home is exciting, but it’s also a major financial decision. Before you fall in love with a house you can't afford, it's crucial to figure out your budget. Understanding how much house you can afford saves you stress, protects your savings, and helps you make smarter choices.
In this guide, we'll break down what impacts your home-buying budget, tools you can use to calculate affordability, and practical tips to make the process easier.
Why It Matters: Setting Realistic Expectations
Most people start house hunting by browsing home listings. They dream about kitchens, backyards, and big windows. Few start by crunching numbers. But knowing your budget first isn't just smart; it's necessary.
If you don't, you risk:
Falling in love with homes way out of your price range
Overstretching your finances
Ending up "house poor" with no money left for anything else
Setting realistic expectations keeps you grounded and focused on finding a home that fits your life — not just your Instagram feed.
The Key Factors That Determine Affordability
Several factors determine how much house you can afford. These include:
1. Your Income
Your gross monthly income (before taxes) is the starting point. Most lenders recommend that your monthly housing costs (including mortgage, taxes, and insurance) stay below 28%-31% of your gross income.
Example:
Monthly gross income: $6,000
28% of $6,000 = $1,680 maximum for housing costs
2. Your Debt
Lenders look at your total monthly debts, including student loans, car payments, and credit cards. The total (plus your new mortgage payment) should usually be under 36%-43% of your gross income. This is called your debt-to-income ratio (DTI).
Pro Tip: The lower your DTI, the more you'll qualify for.
3. Your Down Payment
How much you can put down upfront matters. A larger down payment:
Lowers your monthly payment
Reduces private mortgage insurance (PMI) costs
May qualify you for better loan terms
Typical Down Payment Options:
3% — Minimum for many conventional loans
3.5% — Minimum for FHA loans
20% — To avoid PMI entirely
4. Your Credit Score
A higher credit score means lower interest rates. Even a small difference in your rate can save (or cost) you tens of thousands over the life of the loan.
Example:
Credit score 760+: Prime rates
Credit score 620: Much higher rates
5. Current Interest Rates
When rates are low, you can afford a bigger loan with the same monthly payment. When rates rise, buying power drops. Always check today's mortgage rates before making assumptions.
6. Property Taxes and Homeowners Insurance
These are part of your total monthly housing cost. They vary widely based on location and property type. Don't forget to factor them into your calculation!
The 3 Golden Rules for Home Affordability
To keep things simple, remember these rules:
Rule #1: Keep your housing costs below 28%-31% of your gross income.
Rule #2: Keep your total debt (including mortgage) below 36%-43% of your gross income.
Rule #3: Have at least 3 months of expenses saved after buying the house.
Following these rules can prevent future regrets.
Tools to Calculate How Much House You Can Afford
1. Online Affordability Calculators
Sites like Zillow, NerdWallet, and Bankrate offer free calculators. You plug in your income, debts, down payment, and they estimate your maximum home price.
What They’re Good For:
Quick snapshots
Comparing different scenarios
Caution: Some calculators are overly optimistic. Always sanity-check the numbers.
2. Mortgage Pre-Approval
Pre-approval from a lender is stronger than an online estimate. A lender will:
Review your income, credit, and debts
Tell you the maximum amount you can borrow
Lock in a tentative interest rate
Tip: Get pre-approved before shopping for homes. It shows sellers you're serious and speeds up the buying process.
3. Manual Calculation
Want to double-check everything yourself? Here's a simple formula:
(Gross Monthly Income x 0.28) - (Monthly Debt Payments) = Affordable Housing Payment
From there, use a mortgage calculator to see what loan amount fits that monthly payment.
Practical Tips to Afford More House (Without Overstretching)
1. Boost Your Credit Score
Pay down credit cards, correct errors on your credit report, and avoid taking on new debt. Better scores mean better rates.
2. Save for a Bigger Down Payment
Even a 5%-10% larger down payment can:
Cut your mortgage insurance costs
Lower your monthly payment
Help you qualify for better loans
3. Reduce Debt
Paying off a car loan or credit cards before applying for a mortgage improves your DTI ratio and increases your purchasing power.
4. Consider Different Loan Types
FHA, VA, USDA, and conventional loans all have different requirements. Research them carefully. One might let you afford more house.
5. Be Flexible on Location
Prices vary dramatically between cities, suburbs, and rural areas. Expanding your search can uncover more affordable options.
6. Budget for Closing Costs and Moving Expenses
You'll need extra cash for closing costs (usually 2%-5% of the home price) and moving expenses. Plan for these to avoid financial surprises.
7. Think Long-Term
Don't stretch your budget based on today's income if your future feels uncertain. Leave room for life changes, like job switches or family growth.
Common Mistakes to Avoid When Calculating Affordability
Ignoring all-in costs: Mortgage, taxes, insurance, PMI, HOA fees — all matter.
Overestimating future raises: Base your budget on today's income.
Maxing out lender approval: Just because you're approved for $400,000 doesn't mean you should spend it.
Skipping a home inspection: Hidden issues could cost you thousands after buying.
Real-World Examples
Case 1: Jessica, Single First-Time Buyer
Income: $70,000/year
Monthly debts: $400
Down payment: $15,000
Her max housing budget based on 28% rule: $1,633/month.
With taxes, insurance, and PMI, Jessica can afford a home around $250,000.
Case 2: Mark and Emily, Dual Income
Combined income: $120,000/year
Monthly debts: $1,200
Down payment: $30,000
Their max housing budget: about $2,800/month.
They can likely afford a home around $400,000, depending on taxes and interest rates.
Final Thoughts: Know Your Limits, Then Shop Smart
Buying a home is a huge milestone, but it’s not just about finding the perfect kitchen or backyard. It’s about making sure your finances stay strong and stable.
Use affordability calculators, talk to lenders, run your own numbers — and most importantly, be honest with yourself. The right home isn't just the one you love; it's the one you can comfortably afford.
Don’t hesitate to get help from real estate agents, too. A good agent knows the market, understands your budget, and can guide you toward homes that make sense financially and personally.
When you start your search with a solid budget, you’re not limiting yourself — you’re freeing yourself to focus on what really matters: finding a home where you can live well, not just survive.
