Published November 15, 2025 · 11 min read

How Much House Can I Afford? A Step-by-Step Guide

The 28/36 Rule Explained

The most widely used guideline in mortgage lending is the 28/36 rule. It's simple: your total housing costs should not exceed 28% of your gross monthly income (the "front-end ratio"), and your total debt payments — including housing — should not exceed 36% (the "back-end ratio").

Lenders use these ratios to assess whether you can comfortably afford a mortgage. While some loan programs allow higher ratios (FHA loans can go up to 43% back-end, and some lenders push to 50% for strong borrowers), the 28/36 rule is the gold standard recommended by Freddie Mac and most financial advisors.

Sticking to these limits helps ensure you're not "house poor" — a situation where your mortgage eats so much of your income that you can't save, invest, or handle emergencies. Being house poor is more common than you'd think: a 2024 survey found that 33% of homeowners reported feeling financially stretched by their housing costs.

Step 1: Calculate Your Gross Monthly Income

Your gross monthly income is your total earnings before taxes and deductions. If you earn a salary, divide your annual pay by 12. If you're paid hourly, multiply your rate by your average weekly hours, then multiply by 52 and divide by 12.

• $75,000 annual salary: $6,250/month gross
• $100,000 annual salary: $8,333/month gross
• $150,000 annual salary: $12,500/month gross
• Dual income of $130,000: $10,833/month gross

If you have variable income from commissions, bonuses, or freelance work, lenders typically average the past two years. Be conservative — use the lower of your two years rather than the higher. If you earned $90,000 last year and $110,000 this year, plan around $90,000 to avoid stretching yourself.

What About Net Income?

Lenders use gross (pre-tax) income, but it's worth running the numbers against your net (take-home) pay too. If your gross is $8,333/month but your take-home after taxes, insurance, and retirement contributions is $5,800, then 28% of gross ($2,333) is actually 40% of your take-home. That's a very different picture.

Many financial planners suggest keeping housing costs at 25%–30% of your net pay for true comfort. This is a more conservative — and more realistic — way to budget.

Step 2: Apply the 28% Front-End Ratio

Multiply your gross monthly income by 0.28 to find your maximum housing payment. This includes principal, interest, property taxes, homeowners insurance, and PMI — everything in your PITI payment.

• $6,250/month income × 0.28 = $1,750 max housing payment
• $8,333/month income × 0.28 = $2,333 max housing payment
• $10,833/month income × 0.28 = $3,033 max housing payment
• $12,500/month income × 0.28 = $3,500 max housing payment

This number represents the absolute ceiling for your total monthly housing cost — not just the loan payment, but everything including taxes and insurance. If you're looking at areas with high property taxes (like New Jersey at 2.2%), that tax bite can consume $500–$700/month of your budget before you even account for the loan itself.

Step 3: Factor in Your Debts (36% Back-End)

Now calculate 36% of your gross income and subtract your existing monthly debt payments. Common debts include:

• Car payments ($350–$700/month is typical)
• Student loans ($200–$500/month)
• Credit card minimum payments
• Personal loans or other installments
• Child support or alimony

Example: You earn $100,000/year ($8,333/month) and have a $450 car payment plus $300 in student loans.

• 36% of $8,333 = $3,000 total debt limit
• Existing debts: $450 + $300 = $750
• Maximum housing payment: $3,000 − $750 = $2,250

Notice that the back-end ratio ($2,250) is lower than the front-end ratio ($2,333) in this case. Always use the lower number — that's your real maximum.

How Debt Dramatically Changes Your Buying Power

Using the same $100,000 income, watch what happens with different debt levels:

• No debt: Max housing payment = $2,333 (front-end is the limit) → Afford ~$390,000 home
• $500/month in debt: Max housing = $2,500 → Afford ~$365,000 home
• $1,000/month in debt: Max housing = $2,000 → Afford ~$300,000 home
• $1,500/month in debt: Max housing = $1,500 → Afford ~$210,000 home

That $700 car payment isn't just costing you $700/month — it's reducing your home buying power by roughly $90,000. This is why many financial advisors recommend paying down debt aggressively before buying a home.

Step 4: Account for Down Payment and Rate

Now work backward from your maximum monthly payment to find the home price you can afford. You need to account for the current interest rate, loan term, and your down payment.

With a maximum payment of $2,250 for P&I (after subtracting estimated taxes and insurance of about $450/month), that leaves roughly $1,800 for principal and interest. At 6.75% on a 30-year loan, that supports a loan of about $277,000.

• With 20% down: You can afford a home up to $346,000
• With 10% down: You can afford up to $308,000 (but add PMI to your costs, which reduces your effective maximum)
• With 5% down: You can afford up to $292,000 (higher PMI further reduces buying power)

Notice how smaller down payments don't increase your buying power — they actually decrease it slightly because PMI eats into your monthly budget. The real advantage of a smaller down payment is getting into the market sooner with less cash upfront.

Real Examples by Income Level

Here's a quick reference assuming a 6.75% rate, 30-year term, 10% down, and moderate property taxes and insurance:

• $60,000 income, no debt: Afford up to roughly $220,000–$250,000
• $80,000 income, $400/mo debt: Afford up to roughly $260,000–$300,000
• $100,000 income, $750/mo debt: Afford up to roughly $300,000–$340,000
• $120,000 income, $500/mo debt: Afford up to roughly $400,000–$460,000
• $150,000 income, $800/mo debt: Afford up to roughly $480,000–$540,000

These ranges vary based on your debts, down payment, local tax rates, and the interest rate you qualify for. That's why running the numbers through a calculator is so important — general rules can only get you so far. For a deeper look at calculating your payment, see our mortgage payment calculation guide.

The Conservative Approach: Why 25% Is Better

Here's advice that most mortgage articles won't give you: just because you can borrow up to 28% doesn't mean you should. Many financial planners — including Dave Ramsey's team and several FIRE (Financial Independence, Retire Early) advocates — recommend keeping housing at 25% or less of gross income.

Why? Because at 28%, you're leaving very little room for:

• Retirement savings: Financial planners recommend saving 15%+ of gross income for retirement. At 28% housing + 15% retirement, you're already at 43% before taxes, food, transportation, or fun.
• Emergency fund growth: It takes years to build a 6-month emergency fund if your housing costs are maxed out.
• Children's expenses: The average cost of raising a child is $15,000–$18,000 per year. That's $1,250–$1,500/month that needs to come from somewhere.
• Life enjoyment: Travel, hobbies, dining out, and other quality-of-life expenses get squeezed when housing takes the maximum allowed share.

Dropping from 28% to 25% on a $100,000 income means your max payment goes from $2,333 to $2,083 — about $250/month less home, but $250/month more life. Over 30 years, that's $90,000 in additional flexibility.

Hidden Costs Most Buyers Forget

Knowing the maximum home price is just the beginning. Budget for these commonly overlooked expenses:

• Closing costs: Typically 2%–5% of the loan amount. On a $300,000 loan, that's $6,000–$15,000 due at closing.
• Moving expenses: Average local move costs $1,500–$3,000; long-distance can run $5,000–$10,000.
• Maintenance reserve: Budget 1%–2% of the home's value per year. For a $350,000 home, that's $3,500–$7,000 annually for repairs.
• Furniture and setup: New homeowners typically spend $5,000–$15,000 furnishing their home.
• HOA fees: Can range from $150 to $600+/month for condos and planned communities.
• Utility increase: Moving from a rental to a house often means higher utility bills — $100–$300/month more for a larger space.

The HUD home buying guide recommends having at least 3–6 months of expenses in savings beyond your down payment and closing costs. This safety net protects you from the unexpected.

Don't Forget Your Lifestyle

The smartest approach? Just because a lender approves you for a certain amount doesn't mean you should borrow that much. Lenders look at your financial ability to pay. They don't factor in your desire to travel, save for your kids' college, enjoy dining out, or retire before 65.

Ask yourself these questions before committing to a price range:

• Will this payment still feel comfortable if one spouse loses their job for 3 months?
• Can I still contribute to retirement at the rate I want?
• Will I have enough left over for the life I actually want to live?
• If interest rates drop and I want to refinance later, am I comfortable with the current payment in the meantime?

Many financial planners suggest keeping housing costs at 25% of your income — below the 28% guideline — to leave room for savings and lifestyle. Use our mortgage calculator guide to explore different scenarios before committing to a price range. And if you're a first-time buyer, our first-time home buyer guide walks you through the entire process.

How Location Dramatically Changes Affordability

Two families with identical incomes can afford wildly different homes depending on where they live. Property taxes, insurance costs, and HOA prevalence vary enormously by region, and these hidden costs directly reduce how much house you can buy.

Consider a family earning $100,000/year with a $2,250 maximum housing payment. Here's what they can afford in different states, assuming 10% down and 6.75% interest on a 30-year term:

• Colorado (0.51% tax rate, $1,200/yr insurance): After taxes and insurance of ~$260/month, about $1,990 remains for P&I → Afford up to $370,000
• Florida (0.89% tax rate, $3,800/yr insurance): After taxes and insurance of ~$590/month, about $1,660 remains → Afford up to $300,000
• New Jersey (2.23% tax rate, $1,400/yr insurance): After taxes and insurance of ~$810/month, about $1,440 remains → Afford up to $250,000
• Texas (1.80% tax rate, $2,400/yr insurance): After taxes and insurance of ~$740/month, about $1,510 remains → Afford up to $265,000

The same income buys a $370,000 home in Colorado or a $250,000 home in New Jersey — a $120,000 difference driven entirely by local costs. This is why national "how much can I afford" calculators can be misleading. Always research your specific area's tax rate and insurance costs before setting a budget. The CFPB's rate exploration tool can help you compare costs across regions.

The Pre-Approval Reality Check

Here's a crucial distinction: the amount a lender pre-approves you for is often significantly more than what you should actually spend. Lenders approve based on your debt-to-income ratio and creditworthiness — they don't account for your retirement goals, your children's education fund, your desire to travel, or your emergency savings needs.

It's common for a lender to approve a $100,000 earner for $420,000–$450,000 in home value, even though the 28/36 rule suggests $340,000–$390,000 is the comfortable range. Some borrowers stretch to the maximum approval amount and end up house poor within the first year. According to HUD, taking time to understand your full financial picture before committing is one of the most important steps in the home buying process.

The smartest approach: calculate your maximum using the 28/36 rule, then shop at 90%–95% of that number. The breathing room will make you a more confident buyer and a more comfortable homeowner. Understanding the mortgage payment formula helps you run these scenarios quickly so you can find the sweet spot between what you qualify for and what you can truly afford.

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