How Much Mortgage Can You Afford?

What determines mortgage affordability?

Mortgage affordability is about more than just your income. Lenders look at your debt-to-income ratio, your down payment, the interest rate, and the total monthly payment that includes property taxes, insurance, and other costs. The Consumer Financial Protection Bureau (CFPB) advises that you consider all of these factors when deciding how much to borrow.

The key is to find a payment that fits comfortably within your budget over the long term, not just the maximum you can qualify for.

• Debt-to-income ratio (DTI) measures how much of your gross monthly income goes toward debt payments.
• Down payment reduces the loan amount and can affect whether you need mortgage insurance.
• Interest rate and loan term influence your monthly principal and interest payment.
• Total monthly payment includes principal, interest, taxes, insurance, and any HOA fees.

Sources: Consumer Financial Protection Bureau

The 28/36 rule: a starting point

A common guideline for mortgage affordability is the 28/36 rule. It states that your monthly mortgage payment should not exceed 28% of your gross monthly income, and your total monthly debt payments should not exceed 36% of your gross income.

The 28% limit focuses only on housing costs, while the 36% limit includes all debts, such as car loans, student loans, and credit card payments. This rule helps you stay within a debt level that is generally considered manageable.

Sources: Bankrate, Consumer Financial Protection Bureau

Calculating your debt-to-income ratio

Your debt-to-income ratio is a percentage that compares your monthly debt payments to your gross monthly income. To calculate it, add up all your monthly debt obligations—like car loans, student loans, minimum credit card payments, and any other recurring debts—then divide by your gross monthly income and multiply by 100.

A DTI of 36% or less is generally considered good for mortgage approval. Some loan programs allow higher DTI limits, but a lower ratio typically makes you a more attractive borrower.

• Front-end DTI: housing costs only (mortgage payment, taxes, insurance).
• Back-end DTI: all monthly debts including housing.

Sources: Zillow, Consumer Financial Protection Bureau

Maximum DTI limits by loan type

Different loan programs have different maximum DTI limits, especially when using automated underwriting. Here are the general maximums according to Zillow:

These limits can vary by lender and underwriting system, so check with your lender for exact guidelines.

Sources: Truss Financial Group, Zillow

Down payment

Your down payment directly affects how much mortgage you need. A larger down payment reduces the principal, which lowers your monthly payment. It can also help you avoid mortgage insurance, which is typically required when you put down less than 20%.

Minimum down payment requirements vary by loan type: conventional loans often need at least 3% for first-time buyers, FHA loans require 3.5%, and VA loans offer 0% down for eligible veterans and service members.

• Conventional: 3% minimum for first-time buyers (some programs may vary).
• FHA: 3.5% minimum.
• VA: 0% down for eligible borrowers.

Sources: Mainstream Funding Network, Inc., Consumer Financial Protection Bureau, National Association of Realtors

Interest rates and loan term impact

The interest rate on your mortgage significantly affects your monthly payment. For example, a $200,000 30-year loan at 4% has a $955 monthly principal and interest payment, while the same loan at 5% has a $1,074 payment.

A longer loan term, such as 30 years, spreads payments over more years, lowering the monthly payment but increasing total interest paid. A shorter term, like 15 years, has higher monthly payments but builds equity faster.

Remember that the interest rate is not the same as the APR, which includes fees and other costs. When comparing loans, look at both the interest rate and APR to understand the full cost.

Sources: Consumer Financial Protection Bureau

Step-by-step: How to calculate your affordable home price

Here is a simple method to estimate how much house you can afford. Use your own numbers to work through the steps.

This method gives you a rough estimate. Your lender will do a more detailed underwriting review.

1. Calculate your gross monthly income: divide your annual salary by 12.
2. Calculate your total monthly debt payments: add up car loans, student loans, credit card minimums, and other recurring debts.
3. Compute your back-end DTI: divide total monthly debt by gross monthly income and multiply by 100.
4. Use the lower of these two as your maximum housing payment.
5. Subtract estimated property taxes, insurance, and any HOA fees from that housing payment to get the maximum principal and interest payment you can afford.
6. Use an online mortgage calculator with your estimated interest rate and loan term to find the home price that corresponds to that payment.

Sources: Consumer Financial Protection Bureau

Worked example: $60,000 salary

Let’s apply the steps to a $60,000 annual salary. Gross monthly income = $5,000. Using the 28% front-end rule, your maximum monthly housing payment is $1,400. Using the 36% back-end rule, your maximum total debt payments (including housing) are $1,800.

If you have no other debts, your housing payment can be up to $1,400. After setting aside roughly $300 per month for property taxes and insurance, you have $1,100 for principal and interest. At a 5% interest rate on a 30-year loan, a $205,000 loan would have a monthly payment of about $1,100. Adding a 20% down payment would allow a home price of roughly $256,000.

If you have other debts, your affordable housing payment may be limited by the 36% back-end cap. For example, with $300 in monthly car payments, your total debt payments (including the $1,400 housing payment) would be $1,700, which is below the 36% cap of $1,800. Therefore, your housing payment can still be $1,400, leaving $1,100 for principal and interest (after $300 for taxes and insurance), supporting the same loan amount and home price as the no-debt scenario.

Sources: Consumer Financial Protection Bureau, Bankrate