How Much House Can I Afford?
The answer depends on your income, existing debts, down payment, and local costs like property tax and insurance. Here is a practical guide to figuring out your budget.
The 28/36 Rule
Most lenders use the 28/36 rule to determine how much you can borrow:
- 28% front-end ratio: Your total housing costs (mortgage, taxes, insurance, HOA) should not exceed 28% of your gross monthly income.
- 36% back-end ratio: Your total debt payments (housing + car loans + student loans + credit cards) should not exceed 36% of your gross monthly income.
Income Needed by Home Price
Assuming 20% down, 6.75% rate, 30-year term, with taxes and insurance, here is roughly what you need to earn:
| Home Price | Down Payment | Monthly Payment | Income Needed |
|---|---|---|---|
| $250,000 | $50,000 | ~$1,750 | ~$75,000 |
| $350,000 | $70,000 | ~$2,400 | ~$103,000 |
| $500,000 | $100,000 | ~$3,350 | ~$144,000 |
| $750,000 | $150,000 | ~$4,900 | ~$210,000 |
| $1,000,000 | $200,000 | ~$6,500 | ~$279,000 |
Estimates assume 1.25% property tax, $2,000/year insurance, no PMI, no other debts.
Factors That Affect Affordability
Down Payment
A larger down payment means a smaller loan and lower monthly payments. Putting 20% down also eliminates PMI, saving $100-200/month. FHA loans allow as little as 3.5% down but require mortgage insurance for the life of the loan.
Interest Rate
Every 1% increase in rate adds roughly $200/month per $300,000 borrowed. A 6% rate vs 7% rate on a $400,000 loan means $260 more per month and over $93,000 more in total interest.
Existing Debt
Car payments, student loans, and credit card minimums reduce your borrowing power. A $500/month car payment reduces the home you can afford by roughly $70,000-80,000.
Credit Score
A score of 740+ gets the best rates. Below 680, you may pay 0.5-1.5% higher rates, which on a $400,000 loan costs $100-400 more per month.
Location
Property taxes vary dramatically: 0.3% in Hawaii to 2.5% in New Jersey. On a $500,000 home, that is a difference of $11,000/year in taxes alone.
Tips to Afford More House
- Pay off debt first. Eliminating a $400/month car payment frees up roughly $55,000-65,000 in borrowing power.
- Improve your credit score. Even a 40-point increase can save 0.25-0.5% on your rate, worth $50-100/month.
- Save a bigger down payment. Going from 10% to 20% down eliminates PMI and reduces your loan amount.
- Consider a 15-year mortgage. Rates are typically 0.5-0.75% lower, though monthly payments are higher.
- Look at different areas. Moving 15-20 minutes further from city center can drop prices 20-30%.
- Buy below your maximum. Just because you qualify for $500,000 does not mean you should spend it. Leave room for savings and emergencies.
Hidden Costs of Homeownership
Your mortgage is not your only housing cost. Budget for:
- Maintenance: 1-2% of home value per year ($5,000-10,000 on a $500K home)
- Closing costs: 2-5% of purchase price ($10,000-25,000 on a $500K home)
- HOA fees: $200-500/month in condos and planned communities
- Utilities: Often higher than renting — larger space, lawn care, etc.
- Furnishing: A new home often needs $5,000-15,000 in furniture and appliances
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