The Biggest Financial Decision of Your Life
Buying a home is likely the largest purchase you'll ever make. Get it right, and you'll build wealth for decades. Get it wrong, and you could face financial stress, foreclosure, or being "house poor." This guide will help you understand exactly how much house you can truly afford.
The 28/36 Rule: The Gold Standard
Lenders use the 28/36 rule to determine how much you can borrow:
- 28% Rule: Your monthly housing costs (mortgage, taxes, insurance) shouldn't exceed 28% of your gross monthly income
- 36% Rule: Your total monthly debt payments shouldn't exceed 36% of your gross monthly income
Example: $100,000 Annual Income
| Rule | Calculation | Maximum |
|---|---|---|
| 28% Housing | $8,333 × 0.28 | $2,333/month |
| 36% Total Debt | $8,333 × 0.36 | $3,000/month |
What's Included in Your Monthly Housing Payment?
Your monthly payment is more than just the mortgage. It includes PITI:
Principal & Interest
The actual loan repayment. On a $400,000 mortgage at 7% over 30 years, this is about $2,661/month.
Property Taxes
Varies dramatically by state and county:
| State | Avg. Rate | On $400K Home |
|---|---|---|
| New Jersey | 2.23% | $743/month |
| Texas | 1.60% | $533/month |
| California | 0.71% | $237/month |
| Hawaii | 0.29% | $97/month |
Insurance
Homeowners insurance typically costs $1,500-$3,000/year ($125-$250/month), but varies by location, home value, and coverage.
Private Mortgage Insurance (PMI)
If your down payment is less than 20%, you'll pay PMI—typically 0.5% to 1% of the loan amount annually. On a $400,000 loan, that's $167-$333/month.
How Your Down Payment Affects Affordability
The size of your down payment significantly impacts what you can afford:
$80,000 Income Example (28% = $1,867 max housing)
| Down Payment | Home Price | Monthly Payment |
|---|---|---|
| 3% ($12,000) | ~$280,000 | ~$1,850 |
| 10% ($35,000) | ~$320,000 | ~$1,850 |
| 20% ($72,000) | ~$360,000 | ~$1,850 |
What Lenders Actually Look At
1. Credit Score
Your credit score affects your interest rate:
| Score | Rate Impact | Monthly Difference |
|---|---|---|
| 760+ | Best rates | Baseline |
| 700-759 | +0.25% | +$60/month on $400K |
| 660-699 | +0.5% | +$120/month |
| 620-659 | +1.0% | +$245/month |
| Below 620 | May not qualify | — |
2. Debt-to-Income Ratio (DTI)
Lenders calculate your DTI by dividing total monthly debt by gross monthly income:
DTI = (All Monthly Debt Payments) ÷ (Gross Monthly Income)- Under 36%: Excellent, easy approval
- 36-43%: Acceptable for most loans
- 43-50%: May qualify for FHA loans
- Over 50%: Difficult to get approved
3. Employment History
Lenders prefer:
- 2+ years at current job
- Stable income history
- No gaps in employment
4. Assets & Reserves
You'll need to show:
- Down payment funds
- Closing costs (2-5% of home price)
- 2-6 months of reserves (mortgage payments in savings)
The Hidden Costs of Homeownership
Don't forget these ongoing expenses when calculating affordability:
Maintenance & Repairs
Budget 1-2% of home value annually. For a $400,000 home, that's $4,000-$8,000/year.
HOA Fees
Can range from $100 to $1,000+ per month depending on location and amenities.
Utilities
Often higher than renting, especially for larger homes. Budget $200-$400/month.
Landscaping
If not included in HOA, budget $100-$300/month for lawn care.
State-by-State Considerations
Low Property Tax States
Best for keeping monthly payments low:
- Hawaii (0.29%)
- Alabama (0.40%)
- Colorado (0.51%)
- Louisiana (0.55%)
High Property Tax States
Factor these into your budget:
- New Jersey (2.23%)
- Illinois (2.08%)
- New Hampshire (2.05%)
- Connecticut (2.00%)
No Income Tax States
More take-home pay means more house you can afford:
- Texas, Florida, Nevada, Washington, Wyoming, Alaska, South Dakota, Tennessee
How to Calculate Your True Affordability
Step 1: Calculate Your Maximum Housing Payment
Gross monthly income × 0.28 = Maximum housing payment
Step 2: Subtract Non-Mortgage Costs
- Property taxes (varies by state)
- Homeowners insurance (~$150/month)
- PMI if applicable (~$200/month)
- HOA fees if applicable
Step 3: What's Left is Your Mortgage Budget
Use this number with current interest rates to determine your maximum home price.
Step 4: Reality Check
- Can you comfortably save 20% down?
- Will you have 6+ months emergency fund after closing?
- Can you afford 1-2% annually for maintenance?
Common Affordability Mistakes
1. Buying the Maximum You Qualify For
Just because you're approved for $500,000 doesn't mean you should spend $500,000. Leave room for life's surprises.
2. Ignoring Total Cost of Ownership
A $300,000 home with $8,000/year property taxes costs more than a $350,000 home with $3,000/year taxes.
3. Depleting Your Savings
Don't drain your emergency fund for the down payment. Unexpected repairs will happen.
4. Forgetting Closing Costs
Budget 2-5% of the home price for closing costs—that's $8,000-$20,000 on a $400,000 home.
The "House Poor" Trap
Being "house poor" means your mortgage takes up so much of your income that you can't enjoy life or save for the future. Signs you might become house poor:
- Housing costs exceed 30% of take-home pay
- No money left for retirement savings
- Can't afford vacations or entertainment
- Stressed about every unexpected expense
Conclusion
Understanding how much house you can afford requires looking beyond the sticker price. Consider your total monthly payment, ongoing costs, and lifestyle goals. Use our free House Affordability Calculator to see exactly what you can afford based on your income, debts, and state of residence.
Remember: The best home is one you can comfortably afford while still living your life and saving for the future.