Guides

How Much House Can I Afford?

The price you can afford depends mostly on two numbers: your income before tax and the monthly debts you already pay. Lenders compare them with a pair of limits called debt-to-income ratios (DTI). Here's how they work and how to use them.

The 28/36 rule

The classic guideline has two limits, both measured against your gross monthly income (before tax):

• 28% for housing. Your full housing payment (principal, interest, property tax, home insurance, PMI, and HOA dues) should be at most 28% of your income.
• 36% for all debts. Your housing payment plus your other monthly debts should be at most 36%.

Whichever limit is lower sets your budget. Many loans allow more than 36%, often up to 43% or higher with good credit, but more room to borrow doesn't mean more room in your budget.

What counts as debt

Lenders count minimum required payments on:

• Car loans and leases
• Student loans
• Credit cards (the minimum, not the balance)
• Personal loans, child support, and alimony

Rent you'll stop paying after you buy doesn't count. Neither do utilities, phone bills, groceries, or insurance other than home insurance.

An example

Say you earn $100,000 a year ($8,333 a month), pay $500 a month on a car loan, and have $60,000 for a down payment. Rates are 6.5% on a 30-year loan, property tax is 1.1% of the price, insurance is $1,500 a year, and PMI is 0.5%.

• Housing limit (28%): $2,333 a month
• All-debts limit (36%): $3,000 a month, minus the $500 car payment, which leaves $2,500 for housing

The lower limit is $2,333, so that's the budget. It buys a home of about $341,000:

See this example in the calculator →

Comfortable, guideline, and stretch

The same household gets very different answers depending on how hard you push:

The stretch budget costs $667 more a month than the comfortable one. Lenders work from income before tax, and they don't know about childcare, retirement saving, or other goals. Only you know if that money is free.

What moves your budget

• Debts. In the example, $500 a month of debt doesn't lower the budget, because the 28% limit is lower anyway. Raise the debts to $1,500 and the 36% limit takes over, and the price drops to about $242,000. From there, every $100 a month of debt you pay off adds about $14,000 to your budget.
• Interest rate. At 5.5% the same payment buys about $367,000. At 7.5%, about $319,000. A one-point change in the rate moves the price by roughly $23,000 to $26,000 here.
• Down payment. More down means a smaller loan, and at 20% down PMI goes away.
• Property tax and HOA. Both come out of the same budget. A $300 HOA fee can cost you more buying power than a higher rate.

Before you shop

1. Get preapproved. A lender will check your credit and give you a real number. Your credit score sets your rate, and the rate changes your budget.
2. Plan for closing costs. They usually run 2% to 5% of the price, paid at closing, on top of your down payment.
3. Keep a cushion. Don't put every dollar of savings into the down payment. New homes come with repairs and surprises.
4. Plan the payoff. Once you have a price, open it in the payoff calculator to see the full schedule and how extra payments shorten it.

Try your own numbers in the affordability calculator.

This article is general information, not financial, investment, or tax advice. Examples are rounded and assume a fixed-rate loan; your lender's numbers may differ slightly.