How Much House Can You Really Afford?

How Much House Can You Really Afford?

Lenders will usually pre-approve you for more than you'd actually want to spend. That number reflects their risk, not your life. The question that matters is what monthly payment still leaves you comfortable after everything else.

Start with the 28/36 rule

Most lenders look at two ratios. The front-end ratio wants housing costs at or below 28% of your gross monthly income. The back-end ratio caps total debt payments at 36%. Your real ceiling is the lower of the two, after you subtract taxes, insurance, and any other debts.

Take a household earning $90,000 a year ($7,500 a month). Twenty-eight percent is $2,100. If you also carry $400 in other debt payments, 36% minus that debt leaves $2,300 — so your housing cap is $2,100. Set aside about $420 for taxes and insurance and you have roughly $1,680 left for principal and interest.

The costs lenders leave out

The mortgage is only part of the bill. Property taxes, homeowners insurance, possibly PMI, and plain maintenance all draw from the same budget. A roof or a water heater fails on its own schedule. A workable rule is to reserve at least 1% of the home's value each year for upkeep.

Don't borrow to the limit

Just because a bank will lend it doesn't mean you should take it. Leave room for saving, the occasional trip, and the inevitable surprise. Buy the house you can pay for comfortably, not the one you barely qualify for.

Our home affordability calculator turns income, debts, down payment, and rate into a price you can stand behind. Run the mortgage calculator afterward to see the full payment and total interest.