"How much house can I afford?" is one of the most Googled financial questions in the country - and also one of the most misleadingly answered. Real estate agents and lenders will often tell you what they can approve you for, not what you can comfortably live with. Those numbers are frequently very different. This guide walks through the actual math lenders use, the buffer they leave out, and how to land on a home price that won't leave you house-poor.
Start With the 28/36 Rule
Most conventional lenders use two ratios to size your mortgage. The front-end ratio caps your housing payment (principal, interest, taxes, insurance - often abbreviated PITI) at 28% of gross monthly income. The back-end ratio caps all your debt payments combined, including the mortgage, at 36%. Some lenders will approve up to 43-45% back-end for borrowers with strong credit, but that leaves very little breathing room.
Example: a household earning $95,000/year ($7,917/month gross) has a max housing payment of about $2,217/month under the 28% rule. If they already carry a $450/month car payment and $200/month in student loans, their 36% ceiling is $2,850/month - meaning the mortgage piece would need to shrink to roughly $2,200/month to stay under both limits.
Translating Monthly Payment Into Home Price
Here's what a $2,200/month payment (principal + interest only, at a 30-year term) actually buys at different mortgage rates, assuming 20% down:
| Interest Rate | Max Loan Amount | Approx. Home Price (20% down) |
|---|---|---|
| 5.5% | $387,900 | $484,875 |
| 6.5% | $347,300 | $434,125 |
| 7.5% | $314,200 | $392,750 |
| 8.5% | $286,700 | $358,375 |
Notice the swing: the same monthly budget buys a $484,875 home at 5.5% but only a $358,375 home at 8.5% - a $126,500 difference from rate movement alone. This is why "waiting for rates to drop" or "buying now regardless of rate and refinancing later" is such a common debate among buyers.
Don't Forget Taxes, Insurance, and PMI
The table above is principal and interest only. Property taxes (commonly 0.5%-2.5% of home value annually depending on state - Texas and New Jersey run high, while Hawaii and Alabama run low), homeowners insurance ($1,200-$2,500/year on average), and PMI if you put down less than 20% (typically 0.5%-1.5% of the loan amount per year) all stack on top. On a $400,000 home with a 1.2% tax rate, that's an extra $400/month in taxes alone before insurance is added.
The Down Payment Trade-Off
Putting more down lowers your monthly payment and can eliminate PMI, but it also ties up cash that could go toward an emergency fund, retirement, or renovations. A common middle ground: aim for at least 10% down, and if you're under 20%, budget for PMI to disappear once you hit 20% equity (lenders must automatically cancel it at 22% equity on most conventional loans).
A Buffer Beyond the Bank's Math
Lenders don't know about your daycare bill, your gym membership, or how much you want to save for retirement. Many fee-only financial planners recommend keeping total housing costs closer to 25% of take-home (net) pay, not gross - a noticeably more conservative target than the 28% gross rule. If the 28/36 numbers feel tight against your actual monthly cash flow, trust your own budget over the pre-approval letter.