How Much House Can I Afford?

It's the first question every homebuyer asks, and the answer involves more than just your income. Lenders use specific ratios and guidelines to determine how much they'll lend you, but what a lender approves you for and what you should actually spend are two different numbers.

The 28/36 Rule

The most widely used guideline is the 28/36 rule. Your monthly housing payment (principal, interest, taxes, and insurance, or PITI) should not exceed 28% of your gross monthly income. Your total monthly debt payments (housing plus car loans, student loans, credit cards, etc.) should not exceed 36%.

For example, if your household gross income is $8,000/month, the 28/36 rule suggests your housing payment should be at most $2,240 and your total debt payments should be at most $2,880.

DTI Ratios: What Lenders Actually Use

Lenders calculate your Debt-to-Income (DTI) ratio by dividing your total monthly debt payments by your gross monthly income. Different loan programs have different DTI limits. Conventional loans typically max out at 45% DTI, while FHA loans may allow up to 50% with compensating factors.

Just because a lender will approve you at 45% DTI doesn't mean you should borrow that much. Spending 45% of your gross income on debt leaves very little room for savings, emergencies, or lifestyle.

Pre-Qualification vs. Pre-Approval

Pre-qualification is an informal estimate based on self-reported information. It's useful as a starting point but carries little weight with sellers. Pre-approval is a formal process where a lender verifies your income, assets, credit, and employment, then issues a letter stating how much they're willing to lend you.

In a competitive market, a pre-approval letter is essential. It tells the seller that your financing is solid and you can close. Pre-qualification is a conversation; pre-approval is a commitment.

Don't Forget the Other Costs

Your mortgage payment is only part of the picture. Property taxes, homeowner's insurance, HOA dues, maintenance, and utilities add significantly to your monthly housing cost. A good rule of thumb is to budget 1-2% of the home's value annually for maintenance and repairs.