Figuring out how much house you can afford is the first step in any home search. Buy too much house and your budget buckles under monthly payments, maintenance, and taxes. Buy within your means and homeownership becomes a wealth-building tool. Two key rules and a handful of calculations will give you a realistic target before you ever talk to a lender.
The Two Key Rules
The 28% Rule
Your monthly housing costs — principal, interest, property taxes, and homeowner’s insurance (PITI) — should not exceed 28% of your gross monthly income. If you earn $7,000 per month before taxes, your housing payment should stay at or below $1,960.
The 36% Rule (Total Debt)
Your total monthly debt payments — housing plus car loans, student loans, credit cards — should not exceed 36% of gross monthly income. Lenders call this the debt-to-income ratio (DTI). Many conventional lenders allow DTI up to 43–45%, but staying at 36% gives you more financial cushion and better rates.
How to Estimate Your Maximum Purchase Price
Use this quick calculation:
- Take your gross annual income. Multiply by 2.5 to get a conservative target, or by 3 for a more aggressive one. Example: $100,000 income x 2.5 = $250,000 target home price.
- Check that the resulting monthly payment (at current interest rates) fits within 28% of your gross monthly income.
- Factor in your down payment — the larger your down payment, the lower your monthly payment and the less you borrow.
At a 7% interest rate on a $250,000 loan (30-year fixed), the principal and interest payment is about $1,663. Add property taxes (typically 1–2% of home value annually) and insurance (~$150/month), and you’re looking at $2,100–$2,300 per month total PITI.
Down Payment: How It Changes the Equation
- 3–5% down (conventional, first-time buyer programs): You’ll pay PMI until you reach 20% equity. Smaller down payment means a larger loan and higher monthly payment.
- 10% down: Reduces your loan amount and monthly payment meaningfully. PMI still applies but at a lower rate.
- 20% down: Eliminates PMI entirely. Lowers your monthly payment and reduces total interest paid significantly.
Hidden Costs Beyond PITI
The mortgage payment is only part of homeownership costs. Budget for:
- HOA fees: $200–$600/month in many communities
- Maintenance: Budget 1% of home value per year ($2,500 on a $250,000 home)
- Utilities: Often higher than renting, especially for a larger home
- Closing costs: 2–5% of the purchase price, paid upfront at closing
How Lenders Determine What You Qualify For
Lenders use your credit score, income, debt, employment history, and down payment to determine what they will lend. Getting pre-approved tells you your maximum loan amount — but that maximum is not necessarily what you should borrow. Just because a lender approves you for $400,000 does not mean buying a $400,000 house is a good financial decision for your situation.
What Credit Score Do You Need?
- Conventional loan: 620 minimum, but 740+ gets the best rates
- FHA loan: 580 with 3.5% down, or 500 with 10% down
- VA loan (veterans): No minimum set by VA, but most lenders want 620+
Bottom Line
Start with the 28% rule as your monthly payment ceiling. Work backward from there using current mortgage rates to find your maximum purchase price. Then subtract expected closing costs and ensure you have enough left for a down payment and a 3–6 month emergency fund. That number — not what a lender pre-approves — is your real budget.