How Much House Can I Afford?
A common rule is that your total housing payment should stay under 28% of your gross monthly income, and your total debt payments should stay under 36%. Most loan programs allow a debt-to-income ratio up to 43% to 50% with compensating factors. On a $100,000 household income at a 7% rate, that translates to a home price of roughly $330,000 to $420,000 depending on down payment, taxes, and existing debt.
Key facts
- Front-end ratio (housing)
- 28% of gross income (typical)
- Back-end ratio (total debt)
- 36% to 50% depending on program
- Conventional DTI cap
- 45%, up to 50% with reserves
- FHA DTI cap
- Up to 56.99% with compensating factors
- VA DTI cap
- No hard cap, residual income test instead
| Gross annual income | Max payment at 36% DTI | Approx. home price (no other debt) |
|---|---|---|
| $60,000 | $1,800/mo | $235,000 |
| $80,000 | $2,400/mo | $325,000 |
| $100,000 | $3,000/mo | $415,000 |
| $125,000 | $3,750/mo | $525,000 |
| $150,000 | $4,500/mo | $635,000 |
| $200,000 | $6,000/mo | $860,000 |
Source: Illustrative, based on 30-year fixed amortization and standard DTI limits
What is the 28/36 rule for home affordability?
The 28/36 rule is the conservative starting point most financial planners use. It says your monthly housing payment (principal, interest, taxes, insurance, plus HOA if applicable) should not exceed 28% of your gross monthly income, and your total monthly debt payments should not exceed 36%.
Mortgage lenders are usually more flexible than this rule, which is why borrowers often qualify for more than they should spend. The 28/36 rule protects against being house-poor; the lender's DTI cap protects the lender, not your lifestyle.
How do lenders calculate how much you can borrow?
Lenders work backward from your maximum allowable monthly payment. The formula has four moving parts: income, existing debt, interest rate, and the property's taxes and insurance.
- Calculate gross monthly income from W-2s, 1099s, or 24-month average for self-employed.
- Multiply by the program's DTI cap (45% conventional, 50%+ FHA) to get total allowable monthly debt.
- Subtract existing monthly debt payments (car loans, student loans, credit card minimums).
- The remainder is your maximum total housing payment (PITI plus HOA).
- Subtract estimated property taxes, homeowners insurance, mortgage insurance, and HOA from PITI to isolate principal and interest, then solve for loan amount at the current rate.
This is why pre-approval letters specify a maximum loan amount, not a maximum home price. Add your down payment to the approved loan amount to estimate your true price ceiling.
How does the interest rate change how much house you can afford?
A 1% change in mortgage rate changes your buying power by roughly 10%. On a $3,000 monthly payment budget, dropping from 7% to 6% adds about $35,000 to your purchase price. Rising from 7% to 8% subtracts about $30,000.
This is why borrowers who get pre-approved at one rate sometimes need a new letter if rates move. Loan officers run scenarios at the current rate, not a stale one, before any offer goes in.
| Interest rate | Loan amount supported |
|---|---|
| 5.5% | ~$528,000 |
| 6.0% | ~$500,000 |
| 6.5% | ~$474,000 |
| 7.0% | ~$450,000 |
| 7.5% | ~$428,000 |
| 8.0% | ~$408,000 |
How do property taxes and insurance affect affordability?
Taxes and insurance are part of your DTI calculation, not separate from it. A home in a 1% tax state costs roughly $2,500 per year less than the same priced home in a 2.5% tax state. That difference reduces your qualifying loan amount by tens of thousands of dollars.
Homeowners insurance averages $1,500 to $3,000 per year nationally and runs significantly higher in Florida, Louisiana, and coastal areas. HOA fees are also included in PITI for DTI purposes. A $400 monthly HOA reduces your borrowing power by approximately $60,000 at a 7% rate.
How much should you put as a down payment?
The right down payment is the one that lets you keep healthy reserves after closing. 20% down on a conventional loan eliminates private mortgage insurance and lowers your rate, but it is not required. Conventional loans allow 3% down for first-time buyers, FHA allows 3.5%, VA and USDA allow 0%.
Drain your savings to put 20% down and you start homeownership with no buffer for repairs, job changes, or surprises. Most loan officers recommend keeping 2 to 6 months of total payments in reserves after closing, on top of your down payment and closing costs.
What is debt-to-income ratio and how is it calculated?
Debt-to-income ratio (DTI) is the single most important number in your loan file after credit score. It is calculated by dividing your total monthly debt payments by your gross monthly income.
A borrower earning $8,000 per month with $500 in car payments, $300 in student loans, and $200 in credit card minimums has $1,000 in monthly debt before housing. At a 45% DTI cap, the maximum total monthly payment is $3,600, which leaves $2,600 for the full housing payment.
How much do you need to earn to buy a $500,000 house?
At a 7% rate with 20% down and standard taxes and insurance, a $500,000 home produces a monthly payment of approximately $3,400 to $3,700. Using the 36% back-end DTI rule with no other debt, that requires a gross household income of roughly $113,000 to $125,000.
With $500 per month in existing debt (car payment, student loan), the required income rises to about $128,000 to $140,000. Lenders may approve at lower income with FHA or other higher-DTI programs, but the 28/36 rule still flags those situations as financially tight.
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Frequently asked
How much income do I need to buy a $400,000 house?
At a 7% rate with 20% down and standard taxes and insurance, you need a gross income of approximately $90,000 to $100,000 with no other debt to stay within the 36% back-end DTI rule. With FHA financing or higher DTI tolerance, $75,000 to $85,000 can qualify.
Is the 28/36 rule outdated?
Lenders allow much higher DTI than the 28/36 rule, but the rule is still the conservative standard for financial planners. It exists to protect borrowers from becoming house-poor, not to gatekeep loans. Borrowers in high-cost markets routinely exceed it, but doing so requires accepting a tighter budget elsewhere.
Can I afford a house on a $60,000 salary?
Yes. A $60,000 gross income typically supports a home price of $200,000 to $250,000 at current rates, depending on down payment, taxes, and other debt. FHA financing with 3.5% down expands the range further.
What percentage of my income should go toward a mortgage?
The conservative answer is 28% of gross monthly income on the housing payment alone. Lenders allow more, but 28% leaves room for retirement savings, repairs, and lifestyle. Going above 35% increases financial stress significantly.
Does the lender include my spouse's income if they are not on the loan?
No. If your spouse is not on the mortgage application, their income cannot be used to qualify, and their debts are not counted (except in community property states for the debt side). Adding a spouse adds both their income and their debts to the calculation.
How much do closing costs add to what I need to bring to the table?
Closing costs typically run 2% to 5% of the loan amount. On a $400,000 loan, expect $8,000 to $20,000 in lender fees, title, escrow, and prepaids. Some programs and seller concessions can cover part of these, but plan to have them available in cash.
What is the difference between getting pre-approved for and actually being able to afford a house?
Pre-approval shows the maximum the lender will let you borrow. Affordability is the payment that fits your full life: savings goals, child care, travel, retirement contributions, and unexpected expenses. Most borrowers should buy 10% to 20% below their pre-approved maximum.
Affordability examples are illustrative and assume standard tax, insurance, and amortization assumptions. Actual qualifying amounts depend on full underwriting including income verification, credit, assets, and property details. Not a commitment to lend. Encompass Lending Group, LP NMLS #292897. Equal Housing Opportunity.
