Buying a home is the largest financial decision most people ever make. Get it right and you build wealth steadily for decades. Get it wrong and you end up "house poor" — technically a homeowner but stretched too thin to save, invest, or enjoy life.
The good news: there is a clear, time-tested framework for working out what you can genuinely afford. This guide walks you through it step by step.
The 28/36 Rule: Where Every Lender Starts
The most widely used affordability benchmark is the 28/36 rule. It sets two limits:
- Front-end ratio (28%): Your monthly housing costs — principal, interest, property taxes, and insurance (PITI) — should not exceed 28% of your gross monthly income.
- Back-end ratio (36%): Your total monthly debt payments — housing plus car loans, student loans, credit cards, and any other debt — should not exceed 36% of your gross income.
Both limits apply. Lenders take whichever is more restrictive.
Example: If your household earns $7,000 per month gross:
- Maximum housing payment: $7,000 × 28% = $1,960/month
- Maximum total debt payments: $7,000 × 36% = $2,520/month
- If you already pay $500/month in car and student loans, your housing budget drops to $2,520 − $500 = $2,020/month
Many lenders today stretch the back-end ratio to 43% — the maximum allowed for most qualified mortgages — but staying closer to 36% gives you breathing room when life happens.
How Much House Does That Payment Buy?
Monthly payment limits translate into home prices differently depending on your down payment and interest rate. At a 7% interest rate over 30 years:
| Monthly Payment | Loan Amount | Home Price (10% down) | Home Price (20% down) |
|---|---|---|---|
| $1,500 | ~$226,000 | ~$251,000 | ~$283,000 |
| $2,000 | ~$301,000 | ~$334,000 | ~$376,000 |
| $2,500 | ~$376,000 | ~$418,000 | ~$470,000 |
| $3,000 | ~$451,000 | ~$501,000 | ~$564,000 |
Use our Mortgage Affordability Calculator to get an exact figure based on your own income, debts, and down payment.
The Four Factors That Determine Your Budget
1. Gross Income
Lenders look at your gross income — before tax. If you are self-employed, they typically average the last two years of net income from your tax returns. Bonus and overtime income may count if it is consistent.
2. Existing Debt
Every dollar you already owe reduces how much you can borrow for a home. A $400/month car payment, for example, reduces your maximum home-buying power by roughly $50,000–$60,000 at today's rates. Paying off smaller debts before applying for a mortgage can significantly increase what you qualify for.
3. Down Payment
A larger down payment does three things: it reduces your loan amount (lower monthly payment), it may eliminate private mortgage insurance (PMI), and it typically gets you a better interest rate. The minimum down payment varies by loan type:
- Conventional loan: 3–5% (PMI required if under 20%)
- FHA loan: 3.5% (mortgage insurance required for the life of the loan if under 10%)
- VA loan: 0% for eligible veterans and service members
- USDA loan: 0% for eligible rural properties
4. Interest Rate
Even a 1% difference in interest rate has a large impact over 30 years. On a $350,000 loan, the difference between a 6.5% and 7.5% rate is roughly $220/month — or over $79,000 in total interest over the loan's life. Your credit score is the single biggest factor you control that determines the rate you qualify for.
Hidden Costs Most First-Time Buyers Miss
The mortgage payment is just the beginning. Budget for these additional ongoing costs:
Property taxes vary wildly by location — from under 0.5% of home value annually in Hawaii to over 2% in states like New Jersey and Illinois. On a $400,000 home in a high-tax state, that is $8,000/year — or $667/month added to your payment.
Homeowners insurance typically costs $1,000–$2,000 per year for a standard home. Flood or earthquake coverage costs extra and may be required by your lender if you are in a risk zone.
Private mortgage insurance (PMI) applies if your down payment is under 20% on a conventional loan. It costs 0.5–1.5% of the loan amount annually. On a $320,000 loan, that is $1,600–$4,800 per year. The good news: you can request its removal once you reach 20% equity.
Maintenance and repairs are often underestimated. A common rule of thumb is to budget 1% of your home's value per year for upkeep. Older homes and larger properties tend to cost more. This is money that renters never have to think about.
HOA fees can range from $100 to over $1,000 per month in some communities and condos. These are non-negotiable and should be factored into your affordability calculation before you make an offer.
A Practical Step-by-Step Approach
Step 1: Know your monthly gross income. Add up all reliable income sources before tax.
Step 2: List your existing monthly debt payments. Car loans, student loans, personal loans, minimum credit card payments — all of it.
Step 3: Estimate your target down payment. The more you put down, the less you borrow.
Step 4: Use the 28/36 rule to set your payment ceiling. Multiply your gross monthly income by 0.28, then subtract estimated taxes and insurance to get your maximum principal and interest payment.
Step 5: Run the numbers in a calculator. Use our Mortgage Affordability Calculator to get three scenarios — conservative, standard, and aggressive — so you can see the full range.
Step 6: Work backwards to a home price. Take your maximum monthly payment and, using current interest rates, calculate the loan amount it supports. Add your down payment to get your maximum purchase price.
Step 7: Stress-test the number. Ask yourself: can we still make this payment if one of us loses our job for six months? If rates rise by 1% when we refinance? If we need a new roof in year two?
How Much Should You Really Spend?
Lenders will often approve you for more than you should borrow. The maximum is not the target. Many financial planners recommend targeting the conservative scenario — 25% of gross income on housing — to leave room for retirement savings, an emergency fund, and the unpredictability of real life.
The most financially successful homeowners are not the ones who bought as much house as the bank allowed. They are the ones who bought a home they could comfortably afford and used the breathing room to invest, save, and build wealth alongside their equity.
The Bottom Line
Figuring out how much house you can afford comes down to four inputs: your income, your existing debts, your down payment, and the current interest rate. Apply the 28/36 rule, account for property taxes and insurance, and stress-test the result.
Use the calculator below to get your personalised answer in under a minute — and remember, the number the bank approves is a ceiling, not a recommendation.