How Much Home Can You Afford?

The bank will tell you what you qualify for. That number is always too high. Here's how to calculate what you can actually afford without destroying your financial life.

The #1 homebuying mistake: lenders approve loans based on maximum debt-to-income thresholds — not on what lets you live comfortably, save for retirement, or handle emergencies. A pre-approval letter for $500,000 doesn't mean you should spend $500,000. It means the bank believes you can make the payment. That's a very different thing.

The 28/36 Rule

This is the most widely-used guideline for how much housing you can responsibly afford:

28% — Housing ratio: your total housing payment (PITI: principal, interest, taxes, insurance) should not exceed 28% of gross monthly income.

36% — Total debt ratio (DTI): all monthly debt payments combined (housing + car + student loans + credit cards) should not exceed 36% of gross monthly income.

DTI Examples (Gross $5,000/month)

Other Debts/mo	Housing/mo	Total DTI	Verdict
$400 (car + student loans)	$1,400	36%	Great — most lenders approve
$800 (high debt)	$1,400	44%	Borderline — many lenders decline
$400 (car + student loans)	$1,800	44%	Too high — reduces loan options

How to Calculate Your Real Number

Follow these 5 steps in order.

• 1. Calculate your gross monthly income — use pre-tax income. If self-employed, use a 2-year average from your tax returns. Example: $80,000/year = $6,667/month gross.
• 2. Find your max housing payment (28% rule) — multiply gross monthly income by 28%. This is your maximum PITI. Example: $6,667 × 28% = $1,867/month max housing.
• 3. Check your total DTI (36% rule) — add all monthly debt payments (car, student loans, credit cards). Total debts + housing should be under 36%. Example: $6,667 × 36% = $2,400 max total debt; if you have $500/month in debts, housing max drops to $1,900.
• 4. Back-calculate your home price — use a mortgage calculator with your target payment, current rates, expected taxes/insurance to find your max purchase price. Example: at 7%, $1,867/mo P&I supports roughly a $280K loan, plus your down payment = home price.
• 5. Subtract closing costs from your savings — budget 2%–5% of purchase price in closing costs. This comes out of savings in addition to your down payment. Example: $400K home = $8K–$20K in closing costs on top of your down payment.

Down Payment Options

Down %	Loan Type	Example ($400K)	Key Downside
3%	Conventional (first-time buyer)	$12,000	PMI required, higher rate, less equity
3.5%	FHA Loan	$14,000	Mortgage insurance for life of loan (often)
10%	Conventional	$40,000	PMI still required
20%	Conventional — ideal	$80,000	Large upfront cash required
0%	VA Loan (veterans only)	$0	Must be eligible veteran/service member

PMI — What It Is and When It Ends

Private Mortgage Insurance (PMI) is required on most conventional loans where you put less than 20% down. It's one of the most misunderstood homebuying costs.

• PMI protects the lender (not you) if you default.
• It costs roughly 0.5%–1.5% of the loan amount per year.
• On a $360K loan at 1%, that's $300/month added to your payment.
• PMI cancels automatically once you reach 20% equity (by law — Homeowners Protection Act).
• You can request cancellation early if you hit 20% equity via appreciation + paydown.
• FHA loans have their own version (MIP) that often lasts the life of the loan — a big cost difference.

Key Takeaways

• The bank will approve you for more than you should borrow. Their max is not your max.
• Apply the 28/36 rule: housing under 28% of gross income, all debt under 36%.
• Down payment below 20% means PMI — budget for it and know when it ends.
• Always factor in closing costs (2–5% of purchase price) as a separate savings goal from your down payment.