Buying a home is one of the biggest financial decisions you’ll ever make—and it’s easy to get carried away. You see a beautiful listing, fall in love, and start dreaming big. But the real question isn’t, “what kind of house do you want?” It’s, “how much house can you realistically afford without putting your finances at risk?”
From your take-home pay to your debt load and future goals, there are a lot of moving pieces to consider. This guide walks you through exactly how to run the numbers so you can confidently shop within your budget—and avoid becoming house-poor in the process.
How to Know What You Can Afford
Before you start comparing mortgage rates or looking at real estate listings, you need to figure out what fits your budget. A home is a long-term commitment, and buying too much house can leave you financially stuck.
The good news is, there’s a clear way to run the numbers. Once you know how much income you bring in each month—and how much is going out—you can find a comfortable price range that lets you enjoy your home without giving up everything else you care about.
Net Income vs. Gross Income: What You Should Use
Mortgage lenders use your gross income to calculate how much home you qualify for. But gross income is your pay before taxes, health insurance, and retirement contributions.
What matters more for your personal budget is your net income, or take-home pay. That’s the money you actually have to work with each month. When figuring out how much you can afford, always use your net income. It gives you a more realistic picture of what you can safely spend on housing.
The 28/36 Rule Explained
The 28/36 rule is a quick way to check if a mortgage fits your budget.
- 28% rule: No more than 28% of your gross monthly income should go toward housing costs. That includes your mortgage, property taxes, homeowners insurance, and mortgage insurance.
- 36% rule: Your total monthly debt—housing, car loans, student loans, credit cards—should stay under 36% of your gross income.
If you’re under both limits, you’re in a good position to buy. If you’re above them, you may want to lower your price range or work on reducing debt before applying.
Crunching the Numbers: What Lenders Look For
Lenders don’t just want to see that you have income—they want to see that your income isn’t already stretched thin. That’s why they look closely at your existing debts and credit score.
If you have too many monthly payments or a low credit score, you could get a higher interest rate or even a loan denial. But if your financial picture is solid, you’ll have access to more favorable loan options and terms.
What Debt-to-Income Ratio Tells Lenders
Your debt-to-income ratio, or DTI, measures how much of your income goes toward monthly debt payments. The formula is simple: add up all your monthly debt payments, divide by your gross income, then multiply by 100.
If you make $5,000 a month and have $1,500 in debt payments, your DTI is 30%. Most lenders want your DTI to be below 43%, but the lower the better. A lower DTI means you’re more likely to qualify and less likely to struggle with future payments.
How Your Credit Score Affects Loan Options
Your credit score plays a big role in your loan options and the rate you’ll get. Higher scores show lenders that you manage debt well, which reduces their risk.
- Conventional loans usually require a credit score of 620 or higher.
- FHA loans allow scores as low as 580.
- VA and USDA loans tend to be more flexible, but lenders still check for credit history and patterns of missed payments.
A better credit score can lower your interest rate and reduce your monthly payment. Even a small improvement can save you thousands over the life of the loan.
See also: The Ultimate Guide for First Time Home Buyers
What Your Monthly Mortgage Payment Really Includes
Your mortgage payment covers more than just the loan itself. It usually includes several ongoing costs that are bundled into one monthly payment.
To avoid surprises, break it down into key parts so you know exactly where your money is going—and how it might change over time.
Principal and Interest
This is the core of your mortgage payment. The principal is the amount you borrowed. The interest is the cost the lender charges to loan you that money.
In the early years of a mortgage, most of your payment goes toward interest. As time goes on, more of it starts to chip away at the principal. The size of your down payment, loan term, and interest rate all affect how much you’ll pay each month.
Property Taxes and Homeowners Insurance
These are ongoing costs that vary depending on where you live and the value of your home.
Local governments charge property taxes based on your home’s assessed value. These can range from a few hundred to several thousand dollars per year.
Homeowners insurance protects your home against damage or loss. Your premium depends on the age of the home, materials used, and local risks like flooding or wildfires. Most lenders require this insurance before they’ll approve your mortgage.
PMI and HOA Fees
If you put down less than 20% on a conventional loan, you’ll likely have to pay private mortgage insurance, or PMI. This protects the lender—not you—in case you default. PMI usually costs between 0.5% and 1% of your loan amount per year and is added to your monthly payment.
If your home is part of a condo or planned community, you may also pay homeowners association fees. These cover shared services like landscaping, security, and amenities. HOA fees vary widely, so make sure you include them when budgeting.
Initial Costs of Buying a Home
Buying a house comes with a stack of upfront costs that go beyond your down payment. These expenses can add thousands to the total amount you need before you get the keys.
Planning for these early helps avoid last-minute surprises—and keeps your budget on track.
Down Payments by Loan Type
Your down payment depends on the type of loan you get. Here’s a quick comparison:
- Conventional loans: Minimum down payment is 3%, but putting down 20% helps you avoid PMI.
- FHA loans: Require at least 3.5% down.
- VA loans: No down payment required for eligible veterans and active-duty service members.
- USDA loans: Also offer 0% down in qualifying rural areas.
A larger down payment can lower your monthly payments and interest costs, but you don’t need 20% saved to get started.
See also: How Much Do I Need for a Down Payment on a House?
Closing Costs and Upfront PMI
Closing costs are the fees you pay when finalizing your mortgage. These typically add up to 2% to 5% of the home’s purchase price and may include:
- Loan origination fees
- Title and escrow fees
- Home appraisal
- Credit report fees
- Attorney or notary services (in some states)
If your loan includes PMI, some lenders charge an upfront premium at closing. For FHA loans, that’s 1.75% of the loan amount, which can be rolled into the mortgage.
You may be able to negotiate with the seller to cover some of these costs—or roll them into your loan—but either way, you’ll need cash on hand for at least a portion.
Long-Term Costs to Plan For
Buying a home comes with more than just a mortgage. Once you move in, there are ongoing expenses that can quickly add up if you’re not prepared.
Keeping these long-term costs in mind helps you choose a home that fits not just your budget today—but your future income and lifestyle as well.
Maintenance, Utilities, and Emergency Repairs
Every home needs regular maintenance. Budget at least 1% of your home’s value per year for repairs and upkeep. That includes things like HVAC service, roof patching, plumbing fixes, and appliance replacements.
Then there are the monthly utilities—electricity, gas, water, trash, and internet—which can vary by region and home size. Older homes and larger square footage tend to cost more.
It’s also smart to have a separate emergency fund for surprise repairs, like a leaking roof or broken water heater. Without it, even small issues can turn into big financial stress.
Job Security and Life Changes
Your income might feel steady today, but things can shift quickly. A layoff, career pivot, health issue, or family responsibility can impact your ability to cover a mortgage.
Before buying, ask yourself: If your income dropped tomorrow, how long could you keep making your house payment? A six-month emergency fund offers peace of mind and flexibility when life throws you a curveball.
Tips to Afford More House Without Overstretching
If you’re struggling to hit your price target—or want to lock in better loan terms—there are a few smart ways to improve your financial picture before applying.
Improve Credit Score
A higher credit score can qualify you for a lower interest rate, which means a lower monthly payment.
- Check your credit report for errors and dispute anything inaccurate.
- Make all payments on time—this has the biggest impact on your credit score.
- Pay down revolving debt to lower your credit utilization.
- Avoid new credit applications in the months before applying for a mortgage.
Even a 20- to 40-point improvement can make a noticeable difference in what you’re offered.
See also: How to Improve Your Credit Score
Lower DTI
Your debt-to-income ratio tells lenders how much of your income is already tied up. Lowering it increases how much house you can afford.
- Pay down high-balance loans and credit cards.
- Postpone taking on any new debt.
- If possible, boost your income with a raise, bonus, or side hustle.
The lower your DTI, the better your odds of approval and better terms.
Increase Down Payment
A larger down payment shrinks your loan amount and can eliminate the need for private mortgage insurance.
- Cut back temporarily on non-essential spending.
- Use windfalls like tax refunds, bonuses, or gifts toward your savings.
- Consider short-term freelance work or a part-time job to build your down payment faster.
Even going from 3% to 5% down can reduce your monthly costs and help you qualify for more favorable loans.
See also: How to Save for a Down Payment on a House
Should you stretch for a bigger home?
It’s tempting to max out your budget for the perfect home. Maybe it has more space, a better location, or features that check every box. But spending more than you’re comfortable with can create long-term pressure.
Tradeoffs Between Lifestyle and Budget
A bigger home often means a bigger mortgage—and smaller margins for everything else. That can make it harder to save, travel, invest, or just enjoy life.
Ask yourself what matters most. Is the extra square footage worth cutting back in other areas? Will this home still make sense if your job or income changes? The best choice is often the one that lets you breathe financially and still live well.
Refinancing Later: A Backup Plan
Your mortgage terms aren’t set in stone forever. Once you own a home, you can refinance to change your interest rate, monthly payment, or loan structure.
If rates drop or your credit score improves, refinancing can save you money—or help you tap into equity if needed.
Refinancing does come with costs, though, including a new home appraisal, closing fees, and title updates. Always run the math to make sure it makes sense in the long run. And don’t rely on it as your main plan—buy based on what you can afford today, not what you might refinance into later.
Final Thoughts
Figuring out how much house you can afford isn’t just about qualifying for a loan—it’s about making a smart, sustainable choice for your lifestyle and long-term financial health. A home should be a place of comfort, not a source of constant money stress.
Use this guide as your starting point. Know your income, understand your debts, factor in all the hidden costs, and give yourself some breathing room. With the right plan in place, you can afford a home that fits your budget—and your life.
Ready to take the next step? Run a few scenarios with a mortgage affordability calculator, check your credit score, and start looking at homes with confidence.
Frequently Asked Questions
What is the best way to estimate my home affordability if my income varies?
If you have variable income due to commissions, freelancing, or seasonal work, use your lowest consistent monthly earnings from the past 6–12 months. This gives you a conservative baseline. You can also calculate a monthly average, but be cautious not to overestimate what you can safely afford.
Can I use gift money for my down payment?
Yes, many loan programs allow gift money from a family member or close friend to be used for part or all of your down payment. However, lenders usually require a signed gift letter confirming that the money isn’t a loan and doesn’t need to be repaid.
How does my employment history affect my mortgage approval?
Lenders typically want to see a stable employment history, usually at least two years with the same employer or in the same industry. If you’ve recently changed jobs but stayed in the same field, you may still qualify—as long as your income is steady and well-documented.
How do interest rates affect how much house I can afford?
Even a small change in interest rates can significantly impact your monthly payment and the total loan amount you qualify for. Higher rates reduce your buying power, while lower rates allow you to afford more. Always check how different rates affect your estimated payment before making an offer.
What happens if my mortgage payment becomes unaffordable later?
If you start struggling with payments, contact your lender immediately. You may qualify for options like forbearance, loan modification, or refinancing. The earlier you reach out, the more flexibility you’ll likely have to avoid missed payments or foreclosure.
