Understanding Home Affordability
The question "how much house can I afford?" is the most important financial question you'll answer in your home buying journey. Get it wrong, and you could end up house-poor—struggling to afford groceries while living in your dream home.
The harsh reality: Just because a lender approves you for $500K doesn't mean you should buy a $500K house. Lenders qualify you for the maximum they think you can pay—not what's comfortable.
The 28/36 Rule Explained
The industry-standard formula for home affordability:
- 28% Rule: Your total monthly housing costs (mortgage, taxes, insurance, HOA) should not exceed 28% of your gross monthly income
- 36% Rule: Your total monthly debt payments (housing + car + student loans + credit cards) should not exceed 36% of your gross monthly income
đź’ˇ Example: $100K Income
Monthly gross income: $8,333
- Maximum housing payment (28%): $2,333/month
- Maximum total debt (36%): $3,000/month
If you have $500/month in other debts, your max housing payment drops to $2,500/month.
What's Included in "Housing Costs"?
Your monthly housing payment isn't just your mortgage. It typically includes:
- Principal + Interest - The actual mortgage payment (~60-70% of total)
- Property Taxes - Varies wildly by location (0.3% to 2.5% of home value annually)
- Homeowner's Insurance - $800-2,000/year typical
- PMI (Private Mortgage Insurance) - Required if down payment < 20% (adds $100-200/month)
- HOA Fees - $100-800/month if applicable
Rule of thumb: Add 33% to your principal + interest payment to estimate total monthly cost.
Factors That Affect How Much You Can Afford
1. Your Debt-to-Income (DTI) Ratio
This is the #1 factor lenders consider. Calculate it:
- Front-end DTI: Monthly housing payment Ă· Gross monthly income
- Back-end DTI: All monthly debts Ă· Gross monthly income
Ideal DTI: Below 36% | Maximum DTI: 43-50% (risky)
2. Your Down Payment
More down payment = bigger house you can afford (or smaller monthly payment):
- 3-5% down: Minimum for most loans, but requires PMI
- 10% down: Still requires PMI, but lower monthly cost
- 20% down: No PMI, best rates, lower monthly payment
- 25%+ down: Can sometimes negotiate better rates
3. Current Interest Rates
Interest rates dramatically impact affordability:
- 5% rate: $1,074/month per $100K borrowed
- 6% rate: $1,199/month per $100K borrowed
- 7% rate: $1,331/month per $100K borrowed
A 1% rate increase can reduce your buying power by 10-15%.
4. Your Location
Property taxes and insurance vary wildly:
- Low-tax states (FL, NV, TN): 0.5-1% of home value/year
- High-tax states (NJ, IL, TX): 2-3% of home value/year
A $400K house in NJ costs $8K-12K/year in taxes vs $2K-4K in FL.
⚠️ Don't Max Out Your Budget
Just because you CAN afford $500K doesn't mean you SHOULD buy a $500K house. Consider:
- Maintenance & repairs (1-2% of home value/year)
- Furniture & moving costs ($5K-15K upfront)
- Utilities increase (bigger house = higher bills)
- Emergency fund (should have 6 months expenses)
- Quality of life (can you still save, travel, eat out?)
Conservative approach: Buy 80% of what you're approved for.
Common Home Affordability Mistakes
Mistake #1: Ignoring Your Lifestyle
You're approved for $450K, but you:
- Dine out 4x/week ($800/month)
- Have a $150/month gym habit
- Take 2 vacations/year ($5K total)
- Are planning kids in 2 years
Reality check: That $450K house will force you to cut ALL of these. Buy the $350K house instead.
Mistake #2: Forgetting About Maintenance
Budget 1-2% of home value per year for maintenance:
- $300K house: $3K-6K/year ($250-500/month)
- $500K house: $5K-10K/year ($400-800/month)
Older homes require MORE. New homes require LESS (but have HOA fees instead).
Mistake #3: Not Shopping Mortgage Rates
0.5% difference in rate = $100/month on $400K mortgage = $36,000 over 30 years.
Always get quotes from 3+ lenders.
Mistake #4: Buying Based on Dual Income (Couples)
What if one person:
- Loses their job?
- Takes parental leave?
- Goes back to school?
- Starts a business?
Conservative approach: Buy what you can afford on the lower income alone.