How Much House Can You Afford?
Home affordability depends on four key variables: your income, your existing debts, your down payment, and current mortgage rates. Lenders use debt-to-income (DTI) ratios to determine how much they are willing to lend — and staying within those limits is critical to avoiding financial overextension on a mortgage.
The 28/36 Rule Explained
The most widely used affordability guideline is the 28/36 rule:
- Front-end ratio (28%): Your monthly housing costs — including principal, interest, property taxes, and insurance (PITI) — should not exceed 28% of your gross monthly income.
- Back-end ratio (36%): All monthly debt payments combined — housing plus car loans, student loans, credit card minimums, and other obligations — should not exceed 36% of gross monthly income.
This calculator uses both constraints and returns the lower (more conservative) result as your maximum affordable monthly housing payment, then back-calculates the maximum home price from that payment. FHA loans allow back-end DTIs up to 43%, and some conventional lenders accept up to 50% with compensating factors like large down payments or strong credit scores.
What PITI Means
PITI stands for Principal, Interest, Taxes, and Insurance — the four components of a typical monthly mortgage payment:
- Principal: The portion of your payment that reduces the outstanding loan balance.
- Interest: The cost of borrowing, calculated on the remaining balance each month.
- Taxes: Property taxes, often escrowed by the lender and paid on your behalf annually.
- Insurance: Homeowner's insurance, also commonly escrowed. PMI (private mortgage insurance) is an additional cost if your down payment is below 20%.
The Impact of Down Payment
A larger down payment increases your maximum home price in three ways: it reduces the loan amount (and thus the monthly payment), it eliminates PMI if you reach 20%, and it signals creditworthiness to lenders. A 20% down payment is the traditional standard, but conventional loans allow as little as 3% down, FHA loans allow 3.5%, and VA and USDA loans allow 0% for qualifying buyers. Lower down payments mean higher monthly costs and the added expense of mortgage insurance.
How Mortgage Rates Affect Affordability
Interest rate changes have a dramatic effect on how much home you can afford. At 4% interest on a 30-year loan, a $2,000/month principal-and-interest budget supports approximately a $418,000 loan. At 7%, the same budget supports only about a $302,000 loan — a 28% reduction in buying power from just a 3-percentage-point rate increase. Checking rates from multiple lenders and considering points to buy down the rate can meaningfully increase your purchasing power.
Other Costs to Budget For
Affordability calculations often undercount total homeownership costs. Beyond PITI, budget for: closing costs (typically 2–5% of the loan amount, paid at purchase); home maintenance (1–2% of home value per year); HOA fees where applicable; and utilities, which may be higher than in a rental. A realistic affordability analysis includes all of these, not just the mortgage payment.