House Affordability Calculator

The Complete Guide to Determining How Much House You Can Afford

Buying a home is the largest financial commitment most people make. Yet countless buyers rely on whatever amount a lender approves rather than calculating what they can actually afford comfortably. Someone approved for a $500,000 mortgage might be financially healthier buying $350,000—but the bank won't tell you this. They'll approve you for the maximum amount possible because they profit from larger loans.

I've watched friends buy at their maximum approval amount, become house poor—living paycheck to paycheck, unable to save or enjoy life—stressed constantly about making payments. Then I've seen others who bought well below their approval, building wealth rapidly, maintaining emergency funds, and sleeping peacefully at night. The difference between these outcomes often comes down to understanding true affordability before signing mortgage documents.

The 28/36 Rule: Industry Standard for Affordability

Lenders use the 28/36 rule—also called debt-to-income (DTI) ratios—to determine how much mortgage you qualify for. The front-end ratio (28%) means your total monthly housing costs shouldn't exceed 28% of gross monthly income. Housing costs include principal, interest, property taxes, homeowners insurance, PMI if applicable, and HOA fees. This is abbreviated PITI (Principal, Interest, Taxes, Insurance) plus extras.

Someone earning $80,000 annually ($6,667 monthly gross) has maximum housing payment of $1,867 (28%). If monthly payment for principal and interest is $1,400, property taxes $300, insurance $100, and PMI $150, total is $1,950—exceeding the 28% limit. This person would need to reduce the home price, increase down payment to eliminate PMI, or find lower tax area to qualify under front-end ratio.

The back-end ratio (36%) means total monthly debt payments—housing plus car loans, student loans, credit cards, personal loans—shouldn't exceed 36% of gross income. Same $80,000 earner has maximum total debt of $2,400 monthly. If housing costs $1,867 and they have $400 car payment plus $250 student loan payment, total debt is $2,517—exceeding 36% limit despite being under 28% on housing alone. The back-end ratio would cap housing at $1,750 ($2,400 total minus $650 existing debts).

Lenders apply both ratios and use whichever is more restrictive. Someone with significant non-housing debt will hit the back-end limit first, reducing maximum home price substantially. This is why paying off credit cards and car loans before buying a home increases affordability so dramatically—every $100 in monthly debt payments you eliminate adds roughly $25,000-30,000 to your maximum home price.

Why You Should Buy Below Maximum Approval

Banks approve you for the maximum you can theoretically afford while still making payments. They don't account for lifestyle quality, savings goals, or financial security. Conservative financial advice suggests targeting 25% of gross income for housing instead of 28%, leaving substantial cushion for unexpected expenses, retirement savings, and quality of life.

Someone earning $100,000 annually could qualify for roughly $400,000-450,000 home (depending on down payment, rates, location). But buying a $320,000-350,000 home instead creates dramatically different financial life. The person buying at $400,000 with $2,800 monthly housing payment has minimal savings capacity, lives with constant financial stress, and risks foreclosure if income disruption occurs. The person buying at $330,000 with $2,200 monthly payment can save aggressively for retirement, maintain 6-month emergency fund, afford vacations and hobbies, and weather job loss without panic.

This conservative approach matters even more when interest rates rise. Someone who stretched to buy in 2021 with 3% mortgage feels comfortable. If they lose that job and need to move in 2024 facing 7% rates, they can't afford comparable home—they're trapped. The person who bought conservatively has flexibility to move, downsize temporarily, or ride out economic changes without financial catastrophe.

Understanding Down Payments and PMI

Down payment size dramatically affects both your monthly payment and total homeownership cost. Traditional advice is 20% down to avoid private mortgage insurance (PMI). On $300,000 home, that's $60,000 down payment. With 20% down, you borrow $240,000. At 7% interest over 30 years, monthly principal and interest is $1,597.

With only 5% down ($15,000), you borrow $285,000. Monthly principal and interest rises to $1,897—$300 more monthly. Additionally, you pay PMI of approximately $180-240 monthly (0.75-1% of loan amount annually) because you didn't put 20% down. Total monthly payment difference is $500-540. That's $6,000-6,500 annually. Over 10 years before PMI cancels at 20% equity, you've paid $60,000-65,000 extra for not having $45,000 additional down payment initially.

However, 20% down isn't always optimal or necessary. FHA loans require only 3.5% down. First-time buyers often qualify for 3-5% down conventional loans. VA loans require 0% down for veterans. The trade-off: you pay PMI and higher monthly payments, but you can buy years earlier while saving for larger down payment. In rapidly appreciating markets, buying with 5% down in 2020 at $300,000 then refinancing in 2023 when home is worth $400,000 beats waiting to save 20% down ($60,000) only to find similar homes now cost $400,000 requiring $80,000 down.

The True Cost of Homeownership Beyond Mortgage

Most buyers focus exclusively on monthly mortgage payment but homeownership includes substantial additional costs that renters don't face. Property taxes vary wildly by location—0.3% annually in Hawaii, 2.5% in New Jersey, national average 1.1%. On $350,000 home, that's $1,050-8,750 annually ($88-729 monthly). Research your specific area's property tax rate before buying; it's often the second-largest housing cost after the mortgage itself.

Homeowners insurance typically costs $1,200-2,000 annually ($100-167 monthly) for standard home. More in disaster-prone areas—coastal homes need hurricane coverage, California needs earthquake insurance, flood zones require flood insurance on top of standard policy. HOA fees in condos and planned communities range $200-600+ monthly for shared amenities, exterior maintenance, and reserves. These aren't optional—they're mandatory and can increase annually.

Maintenance and repairs average 1-3% of home value annually. $300,000 home requires $3,000-9,000 yearly for upkeep. First year often exceeds this as you discover deferred maintenance and customize the property. Roof replacement ($10,000-20,000 every 25 years), HVAC replacement ($6,000-12,000 every 15-20 years), water heater ($1,500 every 10-15 years), painting ($5,000-10,000 every 7-10 years). Unlike renting where landlord handles these costs, homeowners absorb everything. Budget $300-500 monthly in separate maintenance savings account so you're prepared when the $8,000 HVAC dies in July.

Utilities typically run higher than renting due to larger square footage. Someone paying $150 monthly for apartment utilities might pay $250-400 for house utilities (electricity, gas, water, sewer, trash, internet). Property must be furnished—new buyers often need $10,000-20,000 in furniture, window treatments, lawn equipment, tools. These hidden costs mean monthly housing cost is typically 40-50% higher than just the mortgage payment alone.

How Credit Score Affects Affordability

Credit score dramatically impacts mortgage interest rates, which directly determines how much you can afford. Rate differences by credit score (approximate current ranges): 760+ excellent credit: 6.5% rate. 700-759 good credit: 6.875% rate. 680-699 fair credit: 7.25% rate. 660-679 marginal credit: 7.75% rate. 620-659 poor credit: 8.75%+ rate.

On $300,000 loan, that 1.25% rate difference between excellent and marginal credit means: 6.5% rate = $1,896 monthly payment, $682,560 total paid. 7.75% rate = $2,146 monthly, $772,560 total paid. The worse credit costs $250 more monthly ($3,000 yearly, $90,000 over loan life). Beyond paying more, lower credit scores also reduce maximum approval amount due to higher monthly payment consuming more of allowed DTI ratios. Someone earning $80,000 approved for $350,000 home with excellent credit might only qualify for $290,000 with poor credit due to rate differences.

Before buying, spend 6-12 months optimizing credit score: pay down credit card balances below 10% of limits (30% of FICO score is credit utilization), dispute any errors on credit reports (25% of reports contain errors), avoid new credit applications (each hard inquiry drops score 5-10 points), make all payments on time (35% of score is payment history). Improving from 680 to 760 credit increases affordability by $30,000-50,000 depending on income level—worth delaying home purchase for if you're close to score tier boundaries.

The Closing Cost Reality

Closing costs typically run 2-5% of home purchase price, with 3% being average. On $350,000 home, expect $7,000-17,500 in closing costs, with $10,500 typical. This is separate from down payment and due at closing. Closing costs include lender fees (origination, underwriting, processing, credit check, appraisal), title search and title insurance (protects against ownership disputes), government recording fees and transfer taxes, prepaid property taxes and homeowners insurance, home inspection, and miscellaneous attorney/escrow fees.

Total cash needed at closing: down payment plus closing costs plus moving costs plus immediate repairs/furniture. Someone buying $350,000 home with 10% down needs: $35,000 down payment + $10,500 closing costs + $5,000 moving/immediate expenses = $50,500 cash at closing. Many buyers save diligently for down payment but forget about closing costs and are surprised by the total cash requirement. Some sellers will pay buyer's closing costs in negotiation (more common in buyer's markets), reducing your cash needs by $5,000-15,000, but this usually requires offering closer to asking price.

When to Buy vs. Keep Renting

Buying isn't always better than renting, despite cultural pressure suggesting homeownership is universally superior. Buy when: (1) You plan to stay in area 5+ years—transaction costs of buying and selling mean you need time for appreciation to offset those costs. (2) You have stable income and 6-month emergency fund—homeownership requires financial stability. (3) Local price-to-rent ratio is reasonable (below 20)—divide median home price by annual rent for equivalent property; ratios above 20 suggest buying is expensive relative to renting. (4) You have 10-20% down payment saved without depleting all savings. (5) Your desired lifestyle and location are compatible with long-term homeownership commitment.

Keep renting when: (1) You might relocate within 3-5 years for career or personal reasons. (2) Local housing market is extremely expensive relative to rents. (3) You lack substantial down payment and would face high PMI costs. (4) Your income is unstable or you're early in career with uncertain trajectory. (5) You have significant consumer debt to eliminate first. (6) You value flexibility over building equity. Renting isn't "throwing money away"—you're paying for housing either way. The question is whether buying's benefits (equity building, stability, control) outweigh renting's benefits (flexibility, predictable costs, no maintenance burden) for your specific situation.

Use the calculator above to determine your maximum home price based on your income, debts, and down payment. Experiment with different scenarios—see how paying off car loan increases your home price, how larger down payment eliminates PMI, how buying below maximum approval improves monthly cash flow. Real affordability isn't what a bank approves you for; it's what allows you to live comfortably while building wealth, maintaining emergency savings, and sleeping peacefully without financial stress. Buy the home that supports your life, not the most expensive house a lender will finance.