7 Steps to Calculate How Much House You Can Afford

Buying a home in today's market can feel overwhelming, especially with mortgage rates near 7%. However, calculating how much house you can afford doesn't have to be stressful; a clear, step-by-step approach using proven affordability rules will help you confidently set your budget and move forward.

This guide outlines seven practical steps to calculate your home affordability using the 28/36 rule, alongside today's market realities. You'll learn to gather the right financial information, apply industry-standard guidelines, and get pre-approved with confidence. By the end, you'll have a clear number that works for both your budget and lender requirements.

Ready to take control of your home buying journey? Contact us to get started.

Collect your income, debt, and credit details

Pin down your monthly income, debts, and credit to present clear information to lenders.

Key terms to understand:

• Debt-to-income ratio (DTI): Share of gross monthly income going to debt payments. Lenders review both housing-only "front-end" DTI and total-debt "back-end" DTI.

• Front-end ratio: Percentage of gross monthly income spent on housing costs only.

• Back-end ratio: Percentage of gross monthly income spent on all monthly debt obligations, including housing, car loans, student loans, and credit cards.

• Gross monthly income: Total income before taxes and deductions, used in affordability calculations.

Gather these essential documents:

• Recent pay information: Base salary plus consistent bonuses or commissions, converted to monthly gross income.

• Monthly debt payments: Minimum required payments for credit cards, auto loans, student loans, personal loans, and existing housing costs.

• Current credit snapshot: Your credit profile influences underwriting and the interest rate offered, directly affecting affordability.

Many buyers worry that excellent credit is necessary, but lenders work with various credit profiles. Getting these numbers right upfront speeds up the pre-approval process.

Set a housing budget using the 28/36 rule

The 28/36 rule is a guideline: spend no more than 28% of your gross monthly income on housing costs and keep total monthly debt at or below 36% of gross income.

To apply it:

1. Calculate 28% of your gross monthly income for your target housing budget ceiling.

2. Calculate 36% of your gross monthly income and subtract your other monthly debts to determine what's left for housing within your back-end limit.

3. Use the lower of the two numbers for a conservative budget that aligns with typical underwriting standards.

Two reference points to consider:

• Quick screen: Many buyers look at homes priced 2.5–3 times their annual income, then refine using the 28/36 ratios.

• Real example: At a $200,000 annual income, buyers can afford roughly $1.09 million with 20% down at a 6.85% interest rate, aligning with a maximum monthly housing payment near $4,666 under the 28% rule.

With mortgage rates near 7%, the same income buys less home than in previous low-rate years, making it crucial to stick close to these proven guardrails.

"The 28/36 rule is a broadly accepted starting point for determining home affordability, but consider your entire financial situation."

Choose a down payment amount and loan type

Bigger down payments lower monthly costs and may expand your price range, while smaller down payments keep cash available for reserves and closing costs.

Key terms to understand:

• Down payment: Upfront cash toward the home's purchase price, reducing your loan amount.

• Loan type: The mortgage program you choose (conventional or government-backed) that sets minimum down payment requirements and underwriting rules.

Common options include:

• Conventional loans: Often available with as little as 3–5% down for qualified borrowers.

• FHA loans: Allow down payments as low as 3.5% for eligible buyers, with flexible qualification requirements.

• VA and USDA loans: Offer 0% down for qualified service members, rural buyers, and other eligible applicants.

Your choice impacts affordability, affecting how much cash you need upfront and what monthly payment fits within the 28/36 limits.

Add taxes, insurance, and other homeownership costs

Build a complete monthly picture to avoid surprises later.

A thorough affordability assessment should include all homeownership expenses and cash reserves, not just principal and interest. Include typical costs such as:

• Property taxes and homeowners insurance

• Homeowners association (HOA) dues, if applicable

• Maintenance, utilities, and emergency reserves for unexpected repairs

These items count toward housing costs in lender calculations and can determine whether you meet the 28% front-end ratio.

Calculate your affordability range

With your financial information gathered, apply the 28/36 rule to determine your target budget and test different scenarios.

Key calculations to make:

• Enter your financial details: Use your gross income, debts, down payment, loan type, interest rate, and estimated taxes/insurance to determine your recommended price range and payment.

• Test rate sensitivity: Analyze the impact of different interest rates. For example, on a $600,000 home, the monthly payment rises from about $2,878 at 6% to $3,193 at 7%—a $315 increase that reduces purchasing power.

Focus on concrete dollar amounts rather than just percentages, as specific examples help evaluate true affordability.

Get pre-approved and lock in your rate

Position pre-approval as your reality check and confidence booster. It translates your ratios and credit profile into an actual loan amount under real lender standards.

Understanding the dynamics:

• Lenders set the rules: Their underwriting standards determine what you can borrow, anchoring your search to realistic lending criteria.

• Rate environment matters: In a high-rate market, more of your payment goes to interest, reducing affordability.

"When mortgage rates are high, borrowers pay more per month in interest, which hampers affordability."

Pre-approval is a lender's conditional commitment stating how much you can borrow after reviewing your income, debts, credit, and assets. Discuss rate-lock options with your lender to reduce uncertainty in a volatile market.

Troubleshoot and plan your next move

If your target number feels tight, consider these strategies:

• Compare loan programs to optimize your down payment and monthly costs. First-time buyers may benefit from FHA (3.5% down), conventional (3–5% down), or specialized zero-down options.

• Reduce monthly debts to improve your back-end DTI and increase your affordable payment within the 36% limit.

• Stress-test higher rates to avoid overextending. A 1-point rate increase can add hundreds per month—like the $315 jump from 6% to 7% on a $600,000 loan.

• Explore different areas for better value; many Midwest and South markets offer more affordability than pricier Northeast and West Coast regions.

• Expect trade-offs: 64% of Americans would make lifestyle changes for affordability, often downsizing space (29%), moving out of state (24%), or living farther from family and friends (19%).

Different generations face unique challenges. Gen X buyers often cite high debt as a barrier, while 42% of Gen Z buyers say they aren't ready yet. Understanding your specific situation helps determine the right first step.

Get clarity and move forward with confidence—contact us to start your journey.

Frequently Asked Questions

How much house can I afford on a $75,000 salary?

Using the 28/36 rule, cap housing costs at about $1,750 per month (28% of $6,250 gross monthly income) and total debt at or below $2,250 monthly (36%). Your actual home price range depends on your down payment, interest rate, property taxes, and other debts.

What is the 28/36 rule and why does it matter?

The 28/36 rule limits housing costs to 28% of gross monthly income and total debt payments to 36%. It helps set a sustainable budget aligned with typical lender underwriting standards, reducing the risk of becoming house-poor or facing loan denial.

How does my credit score affect my mortgage rate?

Higher credit scores typically qualify you for lower interest rates, reducing your monthly payment and increasing how much home you can afford. For instance, the difference between a 6% and 7% rate on a $400,000 loan is about $240 per month—funds that could go toward a more expensive home or other financial goals.

What hidden costs should I budget for beyond the mortgage payment?

Include property taxes, homeowners insurance, HOA dues (if applicable), utilities, routine maintenance, and an emergency reserve for unexpected repairs. These costs can add $300–800+ monthly depending on your home's location, size, and age.

What if I can't afford a 20% down payment?

Many loan programs allow lower down payments. Compare options like conventional loans (3–5% down), FHA loans (3.5% down), or VA/USDA loans (0% down for eligible buyers) to find what fits your budget. Lower down payments typically mean higher monthly costs.

Should I get pre-approved before I start house hunting?

Yes. Pre-approval shows you exactly what a lender will offer based on your financial situation, preventing disappointment and strengthening your offer. In competitive markets, sellers often prefer pre-approved buyers.

What if my pre-approval amount is lower than the home I want?

Options include paying down existing debt to improve DTI ratios, increasing your down payment to lower the loan amount, exploring different loan programs, or expanding your search to areas with better home values. Sometimes, waiting and improving your financial position is the smartest move.