How Much House Can You Actually Afford?

Lenders will approve you for more house than you should buy. Their formula focuses on debt-to-income ratios, ignoring retirement savings, childcare, and lifestyle spending. Here's how to calculate what you can actually afford.

The Lender's Formula: 28/36 Rule

Banks use two ratios:

Front-end ratio (28%): Monthly housing costs ≤28% of gross monthly income

Housing costs include:

• Principal and interest
• Property taxes
• Homeowners insurance
• HOA fees
• PMI (if applicable)

Back-end ratio (36%): All monthly debt ≤36% of gross monthly income

Total debt includes housing costs plus:

• Car payments
• Student loans
• Credit card minimums
• Personal loans
• Child support/alimony

Example: $100,000 Annual Income

Gross monthly income: $8,333

Maximum housing payment (28%): $2,333

Maximum total debt (36%): $3,000

If you have a $400 car payment and $200 student loan, your maximum housing drops to $2,400 ($3,000 - $600)—but still capped at $2,333 by the front-end ratio.

At 6.75% on a 30-year loan, with $350/month for taxes and insurance, that $2,333 payment buys roughly a $360,000 home with 10% down.

Why the Bank's Number Is Too High

The 28/36 rule ignores:

Retirement savings. You should save 15% of gross income for retirement. That $8,333/month income? $1,250 should go to 401(k)/IRA before housing.

Real taxes. Gross income isn't what hits your bank account. After federal, state, and FICA taxes, $100,000 gross becomes roughly $75,000 net—$6,250/month.

Childcare. Daycare for one child runs $1,000-$2,000/month in most metros. The bank ignores this.

Healthcare costs. If your employer coverage is expensive or you're self-employed, premiums eat into housing budget.

Maintenance reserves. Budget 1-2% of home value annually for repairs. On a $360,000 home, that's $300-$600/month.

A More Realistic Calculation

Let's recalculate for that $100,000 income:

Now apply housing at 28% of spendable (not gross):

$5,000 × 0.28 = $1,400 housing budget

That $1,400 payment buys a $200,000 home at 6.75% with 10% down—$160,000 less than the bank would approve.

The Hidden Costs of Homeownership

Maintenance and Repairs

Budget 1% of home value annually for a newer home, 2% for homes over 20 years old. A $300,000 home needs $3,000-$6,000/year set aside.

Big-ticket items by typical lifespan:

• Roof replacement: $8,000-$15,000 (every 20-30 years)
• HVAC system: $5,000-$10,000 (every 15-20 years)
• Water heater: $1,000-$2,000 (every 10-15 years)
• Appliances: $500-$2,000 each (every 10-15 years)

Utilities

Homeowner utilities typically run higher than rentals:

• Larger space to heat/cool
• Landscaping water usage
• You pay for trash, which was often included in rent

Budget $200-$400/month more than your current utility costs, depending on home size and climate.

Property Taxes Increasing

Your county can reassess property values, raising taxes even with a fixed-rate mortgage. California's Prop 13 caps increases at 2% annually, but most states have no cap.

HOA Fees Rising

If you buy in an HOA community, fees typically increase 3-5% annually. A $300/month HOA becomes $400 in 6 years.

Down Payment Reality

The 20% Myth

You don't need 20% down. Options exist for 3-5% down (conventional), 3.5% down (FHA), or 0% down (VA, USDA).

But lower down payments mean:

• PMI: 0.5-1% of loan amount annually until you hit 20% equity
• Higher rate: Some lenders charge more for low-down-payment loans
• Less equity buffer: If values drop 5%, you're underwater

True Cost of a Smaller Down Payment

$300,000 home comparison:

Putting 10% down instead of 20% costs an extra $38,400 over the loan life, plus PMI until you hit 20% equity.

The Emergency Fund Question

Before buying, you should have:

• 3-6 months of expenses in cash (including the new mortgage payment)
• Down payment funds
• Closing cost funds (2-5% of purchase price)
• Moving costs
• Immediate repair/furniture budget

If your down payment wipes out your emergency fund, you're not ready to buy. One furnace failure or job loss could force a sale.

Red Flags You're Buying Too Much

• You can't max out employer 401(k) match after housing costs
• You'll have less than 3 months' expenses in savings after closing
• The payment requires two incomes with no margin for one job loss
• You're counting on future raises to afford the payment
• You're choosing between house payment and other financial goals

Calculate Your Real Number

1. Start with net (after-tax) monthly income
2. Subtract 15% for retirement savings
3. Subtract existing debts (car, student loans, etc.)
4. Subtract $300-$500 for home maintenance reserve
5. Multiply remainder by 0.28-0.30 for your housing budget
6. Use our calculator to find the home price that fits that payment

This formula gives you a sustainable housing payment that doesn't sacrifice your financial future for a house today.