One of the most important questions in home buying is also one of the most misunderstood: how much house can you actually afford? The answer isn’t just about what a lender will approve you for — it’s about what monthly payment you can comfortably sustain while meeting other financial goals.
This guide explains the rules lenders use, gives you a practical formula to calculate your number, and shows you how to stress-test your budget before making the biggest purchase of your life.
The Two Key Rules for Affordability
The 28% Rule: Housing Costs vs. Gross Income
Your total monthly housing costs — including mortgage principal and interest, property taxes, homeowners insurance, and HOA fees — should not exceed 28% of your gross monthly income.
Example: If your household earns $8,000/month gross, your maximum housing costs should be $2,240/month.
The 36% Rule: Total Debt vs. Gross Income
Your total monthly debt payments — including housing costs plus car loans, student loans, credit cards, and any other debt — should not exceed 36% of your gross monthly income. This is known as your debt-to-income (DTI) ratio.
Some lenders will approve up to 43%–50% DTI, but staying under 36% protects your financial flexibility and typically qualifies you for better rates.
Quick Affordability Calculator
Use this formula to estimate your home buying budget:
- Take your annual gross household income
- Multiply by 28% to get maximum annual housing costs
- Divide by 12 to get maximum monthly housing costs
- Subtract estimated property taxes, insurance, and HOA fees to get your maximum mortgage payment
- Use that mortgage payment to back into a home price (see table below)
| Monthly Mortgage Payment | Estimated Home Price (30-yr, 6.5% rate, 20% down) |
|---|---|
| $1,000 | ~$200,000 |
| $1,500 | ~$300,000 |
| $2,000 | ~$400,000 |
| $2,500 | ~$500,000 |
| $3,000 | ~$600,000 |
| $4,000 | ~$800,000 |
What Income Do I Need to Buy a Home at Different Price Points?
| Home Price | Monthly Mortgage (6.5%, 30yr, 20% down) | Recommended Gross Annual Income |
|---|---|---|
| $200,000 | ~$1,011 | ~$80,000 |
| $300,000 | ~$1,517 | ~$100,000 |
| $400,000 | ~$2,023 | ~$130,000 |
| $500,000 | ~$2,528 | ~$160,000 |
| $600,000 | ~$3,034 | ~$200,000 |
| $750,000 | ~$3,793 | ~$250,000 |
Note: Figures assume 20% down payment, exclude property taxes, insurance, and HOA. Add ~$300–$700/month for those costs depending on location.
How Down Payment Affects Affordability
A larger down payment reduces your loan amount, monthly payment, and total interest paid. It also eliminates Private Mortgage Insurance (PMI), which lenders require when you put down less than 20%. PMI typically costs 0.5%–1.5% of the loan amount per year.
| Down Payment | Loan Amount ($400K home) | Monthly Payment (6.5%) | PMI Required? |
|---|---|---|---|
| 5% ($20,000) | $380,000 | $2,403 + ~$160 PMI | Yes |
| 10% ($40,000) | $360,000 | $2,276 + ~$120 PMI | Yes |
| 20% ($80,000) | $320,000 | $2,023 | No |
Hidden Costs First-Time Buyers Often Miss
Property Taxes
Property taxes vary widely by state and county — from under 0.3% in Hawaii to over 2% in New Jersey. On a $400,000 home in a 1.2% tax rate area, that’s $4,800/year ($400/month) added to your housing cost.
Homeowners Insurance
Average homeowners insurance is approximately $1,200–$2,000/year ($100–$170/month) depending on home value, location, and coverage level.
Maintenance and Repairs
Budget 1% of the home’s value annually for maintenance — $4,000/year on a $400,000 home. This is frequently overlooked in affordability calculations and often the first thing that creates financial stress for new homeowners.
Closing Costs
Closing costs typically run 2%–5% of the loan amount — $8,000–$20,000 on a $400,000 purchase. These are separate from your down payment and must be paid at closing.
How Mortgage Rates Affect What You Can Afford
Interest rate changes have a large impact on monthly payment and buying power:
| Rate | Monthly Payment ($320,000 loan, 30yr) | Total Interest Paid |
|---|---|---|
| 5.5% | $1,817 | $334,212 |
| 6.5% | $2,023 | $408,280 |
| 7.5% | $2,238 | $485,680 |
A 1% increase in rate on a $320,000 loan adds about $200/month and $75,000 in total interest. This is why your interest rate (and credit score, which determines it) matters so much.
Should You Buy or Continue Renting?
Buying makes financial sense when:
- You plan to stay in the home 5+ years (to offset closing costs and early-period interest)
- Your total monthly ownership cost is comparable to or lower than renting a similar home
- You have 3–6 months of emergency savings beyond your down payment and closing costs
- Your income is stable and the payment is comfortably under 28% of gross income
Bottom Line
The answer to “how much house can I afford” starts with the 28% rule (housing costs should not exceed 28% of gross monthly income) and the 36% rule (total debt under 36%). Beyond the mortgage calculator, account for property taxes, insurance, maintenance, and PMI — these add $500–$1,000/month to the true cost of ownership for most buyers. Buy what you can afford on a single income if possible, and keep a meaningful cash cushion after closing for unexpected repairs.