How much mortgage can I afford?

That is the most important question for any potential homebuyer!

There are two primary answers to “How much mortgage can I afford?”:

1. What the Lender Will Let You Borrow (The Maximum Qualified Amount)

2. What You Can Comfortably Afford (The Responsible Budget)

You should always aim for the second number, which is usually lower than the first. Here is a detailed guide on how both calculations work, using the standard industry rules.

1. What the Lender Will Let You Borrow: The 28/36 Rule

Lenders use a formula called the Debt-to-Income (DTI) Ratio to determine the maximum loan amount they will approve.¹ The industry standard is often referred to as the 28/36 Rule.²

This rule is based on your Gross Monthly Income (your income before taxes and deductions are taken out).³

📐 The Two Calculations

Lenders will typically take the lower loan amount determined by these two ratios to set your maximum qualifying limit.

✏️ Example Calculation

Let’s assume your Gross Annual Income is $\mathbf{\$84,000}$ $(\text{Gross Monthly Income} = \$7,000)$ and you have existing non-housing debts (car loan, student loan) totaling $\mathbf{\$500}$ per month.

Step 1: Calculate the 28% Maximum Housing Payment

The maximum monthly payment for PITI the lender will allow, based on the front-end ratio, is $1,960.

Step 2: Calculate the 36% Maximum Total Debt Payment

The maximum total monthly debt payment (housing + existing debts) is $2,520.

Step 3: Determine the Housing Payment Limit from the Back-End Ratio

You subtract your existing debts from the total limit:

The maximum monthly payment for PITI the lender will allow, based on the back-end ratio, is $2,020.

Lender’s Result:

The lender will set your maximum PITI payment at the lower of the two results: $1,960 (from the 28% rule).

This maximum monthly payment is then used, along with the current interest rate and property tax estimates, to back-calculate your maximum possible mortgage principal.

2. What You Can Comfortably Afford: The Reality Check

The lender’s maximum (like the $1,960 above) is the absolute ceiling. Financial planners recommend being much more conservative to avoid becoming “house-poor.”

A. The 25% Net Income Rule

A much safer rule of thumb is to calculate your maximum monthly payment based on your Net Monthly Income (your take-home pay after taxes and deductions).

Why it’s better: Your gross income includes money you never see (taxes, retirement, healthcare).⁴ Using net income ensures you have plenty of cash left over for groceries, utilities, savings, and unexpected expenses.

B. Factor in All Ownership Costs

Remember that your PITI payment is just the start. Owning a home comes with significant, unavoidable extra costs:

• Utilities: Your gas, electric, water, and internet bills will likely be higher than when renting.

• Maintenance & Repairs: Budget 1% to 3% of the home’s value annually for repairs. For a $300,000 home, that’s $3,000 to $9,000 per year, or $250 to $750 per month.

• HOA Fees: Mandatory fees for certain communities.

• Closing Costs: You need cash for these (usually 2% to 5% of the loan amount), which are separate from your down payment.

C. Down Payment and Loan Type

• Down Payment: The more you put down, the lower your loan amount and monthly payment.⁵ If your down payment is less than 20%, you will likely have to pay Private Mortgage Insurance (PMI), which is an extra monthly fee that raises your PITI.⁶

• Interest Rate & Term: A higher interest rate or a shorter loan term (e.g., 15 years vs. 30 years) will result in a lower qualifying loan amount but a higher monthly payment.

💡 Your Next Step

The most accurate way to determine what you can afford is to start the pre-approval process with a mortgage lender. They will perform these calculations for you based on current rates and local tax estimates and provide you with a definitive maximum amount.