May 2024 · 7 min read
How Much House Can You Really Afford?
Lenders have strict guidelines for home affordability. Understand the rules and what they mean for your purchase.
The Debt-to-Income Ratio
Lenders use your debt-to-income ratio (DTI) to determine how much house you can afford. Most require a DTI of 43% or less, meaning your total monthly debts (including the new mortgage) shouldn't exceed 43% of your gross income.
If you earn $6,000 per month gross, your maximum housing payment would be around $2,580. This includes principal, interest, property taxes, insurance, and HOA fees.
The Down Payment
A 20% down payment is ideal—it avoids private mortgage insurance (PMI) and shows you're serious about the purchase. However, you can put down as little as 3-5% on conventional loans or 0% on VA loans (if eligible).
Real Example
Sarah earns $80,000 per year ($6,667/month). She has a car payment of $400 and $150 in other debts. Her available mortgage payment is:
$6,667 × 43% = $2,867 maximum
$2,867 − $400 − $150 = $2,317 for housing
With a 20% down payment and 6.5% interest rate, this lets her purchase a home around $350,000.
Don't Forget the Costs
Your mortgage payment isn't the only cost. Factor in property taxes (1-2% annually), homeowner's insurance ($1,000-2,000/year), maintenance (1% of home value annually), and utilities.
Use our mortgage calculator to find your affordable price range.