How Much House Can I Afford? The Real Math Behind Home Affordability

"How much house can I afford?" is the first question every buyer asks — and the answer you get from a bank is almost always too high.

Lenders calculate the maximum you can borrow. That's not the same as what you should spend. This guide gives you the actual formulas, shows you how lenders think, and helps you find a number that won't keep you up at night.

The Three Rules of Home Affordability

Rule 1: The 28/36 Rule

This is the standard guideline that most financial advisors and conventional lenders use.

• 28% Rule ([Front-End Ratio](/blog/dti-ratio-explained)): Your total monthly housing costs should not exceed 28% of your gross monthly income.
• 36% Rule (Back-End Ratio): Your total monthly debt payments (housing + all other debts) should not exceed 36% of your gross monthly income.

Housing costs include:

• Mortgage [principal and interest](/blog/amortization-schedule-guide)
• Property taxes
• Homeowner's insurance
• HOA fees (if applicable)
• [Private mortgage insurance](/blog/mortgage-insurance-pmi-guide) (PMI), if applicable

Formula:

Max monthly housing payment = Gross monthly income × 0.28
Max total monthly debt = Gross monthly income × 0.36
Max housing payment (with other debts) = (Gross monthly income × 0.36) − other monthly debts

Example:

• Gross annual income: $90,000
• Gross monthly income: $7,500
• Car payment: $450/month
• Student loans: $300/month
• Credit card minimums: $100/month
• Total non-housing debt: $850/month

Using the 28% rule: $7,500 × 0.28 = $2,100 max housing payment

Using the 36% rule: ($7,500 × 0.36) − $850 = $2,700 − $850 = $1,850 max housing payment

Your actual limit is the lower of the two: $1,850/month.

Rule 2: The 3x–4.5x Income Rule

A quick gut-check: most people can comfortably afford a home priced at 3 to 4.5 times their gross annual income.

• Conservative (3x): $90,000 income → $270,000 home
• Moderate (4x): $90,000 income → $360,000 home
• Aggressive (4.5x): $90,000 income → $405,000 home

Where you land depends on your debts, down payment, interest rate, and local taxes. High-debt buyers should stick closer to 3x. Low-debt buyers with big down payments can stretch toward 4.5x.

Rule 3: The Take-Home Pay Rule

Some financial planners prefer using net (take-home) pay because it reflects what you actually have:

Keep housing costs at or below 30% of your net monthly income.

If you take home $5,500/month, that's a $1,650 max housing payment. This is more conservative than the 28% gross rule and leaves more room for savings and life expenses.

How Lenders Actually Calculate Your Maximum

Lenders use debt-to-income ratios, but their ceilings are higher than what's comfortable:

An FHA lender might approve you for a back-end DTI of 50%. That means half your gross income goes to debt. That's survivable, not comfortable.

Our advice: use the lender's number as a ceiling and the 28/36 rule as your target.

The Complete Affordability Formula

Here's how to calculate the maximum home price you can afford, step by step.

Step 1: Calculate Your Maximum Monthly Payment

Max monthly payment = Gross monthly income × 0.28

Or, if your debts are high:

Max monthly payment = (Gross monthly income × 0.36) − monthly non-housing debts

Use whichever is lower.

Step 2: Subtract Taxes, Insurance, and Fees

You need to estimate these costs to find out how much of your monthly payment can go toward the actual mortgage:

• Property taxes: Varies wildly. National average is about 1.1% of [home value](/blog/appraisal-process-explained) per year. Check your target county's rate.
• Homeowner's insurance: Average is about $1,800/year ($150/month) nationally. Higher in disaster-prone areas.
• PMI: If putting less than 20% down, add 0.5%–1.5% of the loan amount per year.
• HOA: $0 to $500+/month depending on the property.

Available for mortgage P&I = Max monthly payment − monthly taxes − monthly insurance − PMI − HOA

Example (continuing from above):

• Max monthly payment: $1,850
• Estimated property taxes: $280/month (based on $300,000 home, 1.1% rate)
• Homeowner's insurance: $150/month
• PMI: $100/month (estimated)
• HOA: $0

Available for P&I: $1,850 − $280 − $150 − $100 = $1,320/month

Step 3: Convert Monthly Payment to Loan Amount

Use the mortgage payment formula:

Loan Amount = Monthly P&I × [(1 + r)^n − 1] / [r × (1 + r)^n]

Where:

• r = monthly interest rate (annual rate ÷ 12)
• n = total number of payments (years × 12)

For a 30-year loan at 6.5%:

• r = 0.065 ÷ 12 = 0.005417
• n = 360

The factor works out to approximately 158.21 (this is the present value annuity factor).

Loan Amount = $1,320 × 158.21 = $208,837

Step 4: Add Your Down Payment

Maximum home price = Loan amount ÷ (1 − down payment percentage)

With 5% down:

Max price = $208,837 ÷ 0.95 = $219,828

With 10% down:

Max price = $208,837 ÷ 0.90 = $232,041

With 20% down (no PMI, so recalculate with an extra $100/month):

• Available for P&I: $1,420/month
• Loan amount: $1,420 × 158.21 = $224,658
• Max price: $224,658 ÷ 0.80 = $280,823

Notice how eliminating PMI by putting 20% down actually increases your buying power significantly.

Quick Reference: Affordability by Income

Based on the 28/36 rule, 6.5% rate, 30-year fixed, 5% down, $500/month in other debts, 1.1% property tax, $150/month insurance:

These are estimates. Your real number depends on debts, taxes, insurance, and interest rates.

Costs Most Buyers Forget

The mortgage is only part of homeownership. Budget for these:

Maintenance and Repairs

Budget 1%–2% of the home's value per year. For a $350,000 home: $3,500–$7,000 annually. Older homes cost more.

Utilities

Homeowner utilities typically run $200–$400/month, depending on climate, home size, and efficiency. This is often higher than what renters pay.

Furnishing

An empty house needs furniture. Budget $5,000–$15,000 for the basics in a 3-bedroom home.

Lawn Care and Landscaping

DIY costs $50–$100/month in supplies and equipment. Professional service: $150–$300/month.

Capital Improvements

Major systems have lifespans:

• Roof: 20–30 years ($8,000–$15,000 to replace)
• HVAC: 15–20 years ($5,000–$12,000)
• Water heater: 10–15 years ($1,000–$3,000)
• Appliances: 10–15 years ($500–$2,500 each)

When you buy, check the age of these systems. If the roof has 5 years left, you're buying a $10,000 expense that's coming soon.

Two-Income Household Considerations

If buying with a partner, consider qualifying on one income and treating the second as a buffer. This protects you if one person loses a job, takes parental leave, or goes back to school.

At minimum, make sure you can cover the mortgage on one income for at least 6 months using savings.

How Interest Rates Change Your Buying Power

The same monthly payment buys very different homes at different rates:

Every 0.5% increase in rate costs about $90–$100/month per $300,000 borrowed. Over 30 years, that's $33,000–$36,000 in extra interest.

The "Can I Afford It?" Stress Test

Before committing, run these scenarios:

1. Job loss: Can you cover the mortgage for 6 months with savings alone?
2. Rate increase (for ARMs): If your rate jumps 2%, can you still make the payment?
3. Major repair: If you need a $10,000 repair in year one, can you handle it without going into [credit card debt](/blog/heloc-vs-credit-card)?
4. Income reduction: If one earner's hours get cut by 25%, can you still pay all bills?

If you answer "no" to more than one of these, consider a lower price point.

Renting vs. Buying: The Break-Even Calculation

Buying only makes financial sense if you stay long enough to recoup the transaction costs ([closing costs](/blog/homebuying-closing-process), agent commissions when you sell). A rough break-even is usually 3–5 years.

Simple break-even formula:

Break-even years = Total closing costs (buy + eventual sell) ÷ Monthly savings from owning vs. renting

If closing costs total $15,000 and you save $300/month by owning instead of renting:

$15,000 ÷ $300 = 50 months ≈ 4.2 years

If you might move in 2 years, renting is probably cheaper.

FAQs

How much house can I afford on a $75,000 salary?

With moderate debts ($500/month), a 6.5% rate, and 5% down, you can comfortably afford approximately $215,000–$250,000. With no debts and 20% down, you could stretch to $300,000+.

Should I use gross or net income to calculate affordability?

Lenders use gross income. For your personal budget, use net income — it's more realistic. The 30% of net income rule is a good conservative target.

Does my spouse's income count?

If you apply jointly, both incomes count — but so do both debts. A joint application with a spouse who has significant debt could actually reduce your buying power.

How much should I have saved before buying?

At minimum: down payment + closing costs (2%–5% of price) + 3 months of mortgage payments as an emergency fund. Ideally, 6 months of total expenses in reserve.

Is it better to put 20% down or keep cash in reserve?

For most first-time buyers, a smaller down payment (5%–10%) with healthy cash reserves beats draining savings for 20% down. PMI costs $50–$200/month and can be removed later. Being cash-poor is riskier.

How do property taxes affect affordability?

Dramatically. A home in New Jersey (average 2.2% tax rate) costs about $550/month more in taxes than the same-priced home in Hawaii (0.3% rate) on a $300,000 property. Always check local tax rates before calculating affordability.

What if I have student loans?

Student loans count against your DTI. Income-driven repayment plans (with lower monthly payments) can help your DTI. Some lenders use 0.5%–1% of the total student loan balance as the monthly payment if loans are in deferment.

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Ready to run your own numbers? Use HonestCasa's affordability calculator to get a personalized estimate based on your real income, debts, and local costs.

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