Buying more house than you can afford is one of the most common financial mistakes Americans make. Lenders will often approve you for more than is wise — their job is to lend money, not to protect your financial health. Knowing how to calculate what you can truly afford, rather than what the bank will approve, is the foundation of a sound home purchase. This guide explains the rules, calculations, and real-world factors that determine your comfortable price range in 2026.
The 28/36 Rule: The Classic Affordability Benchmark
The 28/36 rule is the traditional guideline for mortgage affordability:
- 28% rule: Your total monthly housing costs — including principal, interest, property taxes, and homeowner’s insurance (PITI) — should not exceed 28% of your gross monthly income.
- 36% rule: Your total monthly debt payments — PITI plus all other debt obligations (car payments, student loans, credit cards) — should not exceed 36% of gross monthly income.
Example: If your gross monthly income is $7,000, the 28% rule allows up to $1,960 in monthly housing costs. The 36% rule allows up to $2,520 in total debt payments. If you already have $400/month in car and student loan payments, your maximum housing payment drops to $2,120 (to stay within 36% total).
What Lenders Actually Look At: DTI
Lenders use debt-to-income ratio (DTI) to evaluate mortgage applications. Most conventional lenders cap DTI at 43%–45%, and some go as high as 50% for strong borrowers with other compensating factors. FHA loans allow up to 57% DTI in some cases.
DTI = (Total monthly debt payments ÷ Gross monthly income) × 100
Getting approved for a loan at 45% DTI does not mean it is wise. At 45% DTI, nearly half your pre-tax income goes to debt payments before taxes, retirement, groceries, utilities, or car insurance. Budget carefully before borrowing to the maximum.
The True Monthly Cost of Homeownership
Lenders focus on PITI, but actual homeownership costs include more:
- Principal and interest: The mortgage payment calculated from loan amount, rate, and term
- Property taxes: Typically 0.5%–2.5% of home value per year, depending on location. On a $400,000 home in a 1.2% tax rate area, that is $4,800/year or $400/month.
- Homeowner’s insurance: Typically $1,000–$2,500/year ($85–$210/month) for a median-priced home
- Private mortgage insurance (PMI): 0.5%–1.5% of loan amount per year if you put less than 20% down
- HOA fees: $100–$600/month for condos, townhomes, or planned communities. Zero for many single-family homes.
- Maintenance and repairs: Budget 1%–2% of home value per year for routine maintenance and repairs. On a $400,000 home, that is $4,000–$8,000 per year.
- Utilities: Often higher than apartment utilities due to larger square footage. Budget $200–$500/month depending on climate and home size.
Add these up before comparing rent to a mortgage payment. A $2,000 mortgage payment on a $350,000 home may have $500/month in taxes and insurance, $250/month in PMI, and $400/month in maintenance — making the true cost $3,150/month, not $2,000.
How to Calculate Your Affordable Home Price
Working backward from the 28% rule:
- Take your gross annual income and divide by 12 to get monthly income.
- Multiply by 0.28 to find the maximum PITI (principal, interest, taxes, insurance).
- Subtract estimated monthly property taxes and insurance from that figure.
- The remainder is your maximum principal-and-interest payment.
- Use a mortgage calculator to find the loan amount that produces that payment at the current interest rate and a 30-year term.
- Add your down payment to the loan amount to find your maximum purchase price.
Example with $90,000 gross annual income ($7,500/month):
- 28% of $7,500 = $2,100 maximum PITI
- Estimated taxes + insurance on a $400,000 home: ~$550/month
- Maximum P&I: $2,100 − $550 = $1,550
- At a 7% 30-year mortgage rate, $1,550/month supports a loan of approximately $233,000
- With 10% down ($26,000), maximum purchase price ≈ $259,000
- With 20% down ($52,000), maximum loan ≈ $194,000 for the same payment
Down Payment: How It Affects Affordability
A larger down payment reduces your loan amount, monthly payment, and eliminates PMI once you cross 20%. But it also requires more cash upfront. The sweet spots:
- 3%–5% down: Minimum for conventional loans. Lower barrier to entry; PMI required.
- 10% down: Reduces loan balance and PMI cost meaningfully.
- 20% down: Eliminates PMI entirely. Best rate from most lenders. Significantly reduces monthly payment.
Do not drain your emergency fund to reach 20% down. Having 10% down with 6 months of emergency cash is safer than 20% down with no financial cushion for repairs or job loss.
How Your Credit Score Affects How Much You Can Afford
Your credit score directly affects the interest rate you qualify for, which affects your monthly payment and the purchase price you can afford:
- Credit score 760+: Best available rates (e.g., 6.8% in the current market)
- Credit score 700–759: Slightly higher rate (e.g., 7.0%–7.1%)
- Credit score 640–699: Higher rate (e.g., 7.4%–7.7%)
- Credit score below 640: May not qualify for conventional financing; FHA at higher rates
A 0.5% rate difference on a $300,000 mortgage is approximately $90/month — over $32,000 over the life of the loan. Improving your credit score before applying can significantly expand your buying power.
Bottom Line
What a lender approves and what you can comfortably afford are often different numbers. Use the 28/36 rule as your guide, account for all true ownership costs beyond the mortgage payment, and leave room in your budget for maintenance, repairs, and life events. Buying conservatively now leaves you financially flexible — and still building equity — for decades to come.