How Much House Can I Afford? A Complete Mortgage Guide

The Quick Rule: 28/36

The traditional guideline used by lenders and financial advisors is the 28/36 rule:

• Spend no more than 28% of your gross monthly income on housing costs (mortgage payment, property taxes, homeowners insurance, HOA fees).
• Spend no more than 36% of gross monthly income on total debt (housing + car payments, student loans, credit cards, etc.).

Example: Gross monthly income of $6,000.
Maximum housing payment: $6,000 × 0.28 = $1,680/month
Maximum total debt: $6,000 × 0.36 = $2,160/month
If you have $400/month in car and student loan payments, maximum housing = $2,160 − $400 = $1,760/month (still under the 28% cap of $1,680, so the 28% limit applies).

Debt-to-Income Ratio (DTI)

Lenders primarily look at your Debt-to-Income (DTI) ratio: total monthly debt payments ÷ gross monthly income. Most conventional lenders cap at 43% DTI for mortgage approval, though the lower the better. FHA loans allow up to 50% DTI in some cases.

The Home Price Calculation

Once you know your maximum monthly payment, estimate the maximum home price:

As a rough rule, a monthly payment of $1 can support approximately $130–$170 in loan amount depending on current interest rates. At 7% interest rate over 30 years, $1,000/month payment ≈ $150,000 loan.

Example: Maximum payment $1,680. Estimated loan ≈ $1,680 × 150 = $252,000 loan. Add your down payment to find your total home budget.

Down Payment Impact

Down Payment	On $300,000 Home	Loan Amount	PMI Required?
3.5% (FHA min)	$10,500	$289,500	Yes
5%	$15,000	$285,000	Yes
10%	$30,000	$270,000	Yes
20%	$60,000	$240,000	No

PMI (Private Mortgage Insurance) is required when you put less than 20% down, typically adding 0.5–1.5% of the loan amount per year to your costs. On a $285,000 loan at 1%, that's $2,850/year ($237.50/month) extra.

Hidden Costs of Homeownership

Your mortgage payment is not your only housing cost. Plan for:

• Property taxes: Typically 0.5–2.5% of home value per year depending on location
• Homeowners insurance: ~$100–200/month for a median home
• Maintenance and repairs: Budget 1–2% of home value per year
• HOA fees: $0–$500+/month for condos and communities
• Utilities: Often higher than renting for the same square footage

Credit Score Impact on Your Mortgage Rate

Credit Score	Typical Rate	Monthly Payment (on $250k)
760+	Best rates available	Lowest payment
700–759	Good rates	Moderate
660–699	Average rates	Higher
Below 660	Subprime / FHA	Significantly higher

A difference of 1% in mortgage rate on a $250,000 loan over 30 years changes your total interest paid by approximately $50,000.