How Much House Can I Afford? Complete Home Affordability Guide 2026

Buying a home is likely the largest financial decision you'll make. While lenders may pre-approve you for a certain amount, that doesn't mean you should (or can comfortably) borrow that much.

In this comprehensive guide, you'll learn multiple methods to calculate your true home affordability, understand the 28/36 rule, account for hidden costs, and avoid becoming house poor.

Table of Contents

1. The 28/36 Rule Explained
2. How Lenders Calculate Affordability
3. Your True Affordability Number
4. Hidden Homeownership Costs
5. Down Payment Requirements
6. Special Considerations
7. Real Affordability Examples

The 28/36 Rule Explained

The 28/36 rule is the mortgage industry's standard guideline for determining how much housing debt you can safely carry.

The 28% Front-End Ratio

Rule: Your total housing payment should not exceed 28% of your gross monthly income.

Housing Payment Includes:

• Principal and interest (P&I)
• Property taxes
• Homeowners insurance
• HOA fees (if applicable)
• Private mortgage insurance (PMI, if under 20% down)

Formula: Maximum housing payment = Gross monthly income × 0.28

Example:

• Gross monthly income: $7,000
• Maximum housing payment: $7,000 × 0.28 = $1,960/month

The 36% Back-End Ratio

Rule: Your total debt payments should not exceed 36% of your gross monthly income.

Total Debt Includes:

• Housing payment (P&I, taxes, insurance, HOA)
• Credit card minimum payments
• Car loans
• Student loans
• Personal loans
• Other recurring debt

Formula: Maximum total debt = Gross monthly income × 0.36

Example:

• Gross monthly income: $7,000
• Maximum total debt: $7,000 × 0.36 = $2,520/month
• Existing debt: $600/month
• Available for housing: $2,520 - $600 = $1,920/month

Which Number Wins?

Always use the lower number when front-end and back-end ratios differ.

Example:

• Front-end (28%): $1,960
• Back-end (36% minus existing debt): $1,920
• Use: $1,920 ✓ (more conservative)

How Lenders Calculate Affordability

Step 1: Calculate Your Gross Monthly Income

W-2 Employees:

• Annual salary ÷ 12
• Example: $90,000 ÷ 12 = $7,500/month

Hourly Workers:

• Hourly rate × hours per week × 52 weeks ÷ 12 months
• Example: $35/hour × 40 hours × 52 ÷ 12 = $6,067/month

Self-Employed:

• Average of last 2 years tax returns
• After deductions (AGI)
• Example: 2024 AGI $85,000 + 2025 AGI $95,000 = $90,000 average
• Monthly: $90,000 ÷ 12 = $7,500

Additional Income (if documented):

• Bonuses (2-year average)
• Commission (2-year average)
• Rental income (after expenses)
• Investment income
• Alimony/child support

Step 2: Apply the 28% Rule

Example:

• Gross monthly income: $8,000
• Maximum housing payment: $8,000 × 0.28 = $2,240

Step 3: Subtract Property Taxes and Insurance

Typical Costs:

• Property taxes: 1.1% of home value annually
• Homeowners insurance: $1,400-2,000/year
• HOA fees: Varies ($100-500/month)
• PMI (if under 20% down): 0.5-1% annually

Example Calculation:

Gross monthly income: $8,000 28% rule: $2,240/month maximum housing payment

Estimated costs:

• Property taxes: $250/month
• Insurance: $150/month
• HOA: $100/month
• PMI: $100/month Total non-mortgage: $600/month

Available for P&I: $2,240 - $600 = $1,640/month

Step 4: Calculate Maximum Loan Amount

Using mortgage calculator with 7% interest rate, 30-year term:

• Monthly P&I: $1,640
• Maximum loan: ~$246,000

With 20% down:

• Maximum loan: $246,000
• Down payment (20%): $61,500
• Maximum home price: $307,500

With 10% down:

• Maximum loan: $246,000
• Down payment (10%): $27,333
• Maximum home price: $273,333

Your True Affordability Number

Lender approval ≠ what you can comfortably afford.

Conservative Affordability (Recommended)

Use 25% instead of 28%

Why 25%?

• Buffer for unexpected expenses
• Room for savings goals
• Lifestyle flexibility
• Financial stress reduction
• Easier to manage if income drops

Example Comparison:

Income: $7,000/month

28% Rule: $1,960 housing payment 25% Rule: $1,750 housing payment Difference: $210/month ($2,520/year)

That $210 can go to:

• Additional retirement savings
• Emergency fund
• Home maintenance
• Debt payoff
• Quality of life

Income-Based Purchase Price Guidelines

Quick Reference Table:

| Annual Income | 28% Rule Max | 25% Rule Max | Conservative Max | |--------------|--------------|--------------|------------------| | $50,000 | $153,000 | $137,000 | $125,000 | | $75,000 | $230,000 | $206,000 | $187,500 | | $100,000 | $307,000 | $275,000 | $250,000 | | $125,000 | $383,000 | $343,000 | $312,500 | | $150,000 | $460,000 | $412,000 | $375,000 | | $200,000 | $613,000 | $549,000 | $500,000 |

Assumes 7% interest, 20% down, 1.1% property tax, $1,500/year insurance

The 3x Income Rule of Thumb

Conservative guideline: Home price should not exceed 3x your gross annual income.

Example:

• Annual income: $100,000
• Maximum home price: $300,000

Adjustments:

• Low interest rates: Up to 3.5x
• High cost of living area: Up to 4x (with caution)
• Low debt: Up to 3.5x
• Significant debt: Under 2.5x

Hidden Homeownership Costs

Beyond the Mortgage

Many first-time buyers focus only on the mortgage payment and get caught off-guard by total costs.

True Monthly Costs:

1. Principal & Interest (P&I) The mortgage payment everyone focuses on.

$300,000 home, 20% down ($240,000 loan):

• 7% rate, 30 years
• P&I: $1,597/month

2. Property Taxes Varies significantly by location.

• National average: 1.1% annually
• $300,000 home: $3,300/year
• Monthly: $275

High-tax states (NJ, IL, TX): 2-2.5% Low-tax states (HI, AL, LA): 0.3-0.6%

3. Homeowners Insurance Protects structure and belongings.

• National average: $1,700/year
• High-risk areas: $2,500-5,000/year
• Monthly: $142

4. HOA Fees Common in condos, townhomes, some single-family.

• Range: $50-800/month
• Covers: Exterior maintenance, amenities, insurance
• Monthly: $200 (if applicable)

5. PMI (if under 20% down) Required when down payment less than 20%.

• Rate: 0.5-1.5% of loan annually
• $240,000 loan at 1%: $2,400/year
• Monthly: $200
• Drops off once you reach 20% equity

6. Utilities Often higher than renting.

• Electric: $100-200/month
• Gas: $50-150/month
• Water/Sewer: $50-100/month
• Internet: $60-100/month
• Trash: $20-40/month
• Monthly: $350 average

7. Maintenance & Repairs Budget 1-2% of home value annually.

• $300,000 home: $3,000-6,000/year
• Monthly: $250-500

Examples:

• HVAC replacement: $5,000-10,000
• Roof replacement: $8,000-15,000
• Water heater: $1,000-2,000
• Appliances: $500-2,000 each

Total Monthly True Cost:

| Category | Monthly Cost | |----------|-------------| | P&I | $1,597 | | Property taxes | $275 | | Insurance | $142 | | HOA | $200 | | PMI (if applicable) | $200 | | Utilities | $350 | | Maintenance | $375 | | Total | $3,139 |

Compare to mortgage-only thinking:

• Mortgage payment alone: $1,597
• True cost: $3,139
• Hidden costs: $1,542/month ($18,504/year)

First-Year Additional Costs

Move-In Expenses:

• Moving company: $1,500-5,000
• Furniture: $5,000-15,000
• Window treatments: $1,000-3,000
• Lawn equipment: $500-1,500
• Tools: $500-1,000
• Home improvements: $5,000-20,000

One-Time Closing Costs:

• Typically 2-5% of purchase price
• $300,000 home: $6,000-15,000

Total first-year extras: $20,000-50,000

Down Payment Requirements

How Much Do You Need?

Conventional Loans:

• Minimum: 3-5% down
• Standard: 20% down
• No PMI requirement: 20%+

FHA Loans:

• Minimum: 3.5% down
• Credit score 580+
• Mortgage insurance for life of loan

VA Loans (Veterans):

• Minimum: 0% down
• No PMI required
• Funding fee: 2.15% (can be financed)

USDA Loans (Rural Areas):

• Minimum: 0% down
• Income limits apply
• Property must be in eligible rural area

Down Payment Impact

Example: $300,000 Home

20% Down ($60,000):

• Loan amount: $240,000
• Monthly P&I: $1,597
• No PMI
• Total: $1,597/month

10% Down ($30,000):

• Loan amount: $270,000
• Monthly P&I: $1,796
• PMI: $225/month
• Total: $2,021/month
• Additional cost: $424/month

5% Down ($15,000):

• Loan amount: $285,000
• Monthly P&I: $1,896
• PMI: $238/month
• Total: $2,134/month
• Additional cost: $537/month

3% Down ($9,000):

• Loan amount: $291,000
• Monthly P&I: $1,936
• PMI: $243/month
• Total: $2,179/month
• Additional cost: $582/month

Over 30 years:

• 20% down: $574,920 total
• 3% down: $784,440 total
• Difference: $209,520

Saving for Down Payment

Traditional Method:

Target: $60,000 (20% of $300,000)

Aggressive savings:

• Monthly: $1,000
• Time: 60 months (5 years)
• In HYSA at 4.5%: $66,850

Moderate savings:

• Monthly: $600
• Time: 100 months (8.3 years)
• In HYSA at 4.5%: $73,500

Alternative Sources:

• First-time buyer programs
• Down payment assistance
• Gift from family
• 401(k) loan (not recommended)
• Roth IRA contributions (up to $10,000 first-time buyer)

Special Considerations

Dual-Income Couples

Strategy 1: Use Lower Income Only More conservative, protects against job loss.

Example:

• Spouse 1: $80,000/year
• Spouse 2: $60,000/year
• Use only: $60,000
• Max home: $180,000-240,000

Strategy 2: Use Combined with Buffer Use both incomes but buy below max.

• Combined: $140,000/year
• 28% rule max: $430,000
• But buy: $350,000 (safety buffer)

High-Debt Situations

If you have significant debt:

• Pay off first before buying
• Or buy significantly under max
• Focus on 36% back-end ratio

Example: Income: $100,000/year ($8,333/month) Existing debt: $1,200/month

28% front-end: $2,333 max housing 36% back-end: $3,000 total - $1,200 debt = $1,800 housing Use: $1,800 (more restrictive)

Better approach: Pay off $600/month debt first:

• New back-end limit: $2,400 housing
• Significant increase in affordability

Self-Employed Buyers

Challenges:

• Income verification harder
• Need 2 years tax returns
• Lenders use after-deduction income (AGI)

Tips:

• Minimize business deductions 2 years before buying
• Maintain consistent income
• Strong credit score (720+)
• Larger down payment (20%+)
• Keep business/personal finances separate

Example:

Gross business income: $150,000 After deductions: $85,000 AGI Lender uses: $85,000

Max home (3x): $255,000 (vs. $450,000 if they used gross income)

High Cost of Living Areas

In expensive markets (SF, NYC, LA, Seattle), traditional ratios don't always work.

Adjustments:

• May go to 35-40% front-end ratio
• But requires:
  • Minimal other debt
  • Strong income
  • Large emergency fund (12+ months)
  • High credit score

Reality: Even with adjustments, many are priced out of homeownership in HCOL areas.

Alternatives:

• Rent longer, save more
• Consider lower-cost neighborhoods
• Smaller home/condo
• Relocate to lower-cost area

Common Home Buying Mistakes

Mistake 1: Maxing Out the Pre-Approval

The Problem: Lenders approve you for the maximum you can pay, not what you should pay.

The Reality:

• Lenders want you to borrow more (more interest)
• You know your lifestyle needs better than they do
• Unexpected expenses happen

The Solution: Set your own limit at 80-90% of pre-approval amount.

Mistake 2: Forgetting Property Taxes

The Problem: Focusing only on mortgage payment, forgetting taxes can be $500-800+/month.

The Reality: $300,000 home:

• Mortgage: $1,600/month
• Taxes: $550/month
• Insurance: $150/month
• Total: $2,300/month (45% more than mortgage alone)

The Solution: Always calculate PITI (Principal, Interest, Taxes, Insurance) as your true payment.

Mistake 3: House Poor Syndrome

The Problem: Spending so much on housing that there's nothing left for life, savings, or emergencies.

Signs You're House Poor:

• Can't save for emergencies
• No money for retirement
• Stressed about every expense
• Can't afford home maintenance
• No budget for fun or travel
• One paycheck from disaster

The Solution: Buy below your maximum, maintain 15-20% savings rate, keep emergency fund.

Mistake 4: Ignoring Future Plans

The Problem: Buying without considering 5-year lifestyle changes.

Questions to Ask:

• Will you have children?
• Will income change?
• Might you change careers?
• Want to travel more?
• Need to support aging parents?
• Considering graduate school?

The Solution: Build flexibility into your budget. Don't max out based on current situation.

Real Affordability Examples

Example 1: Single Buyer, Moderate Income

Profile:

• Income: $65,000/year ($5,417/month)
• Current rent: $1,200/month
• Existing debt: $350/month (car + student loans)
• Credit score: 720
• Saved for down payment: $25,000

Affordability Calculation:

28% front-end: $5,417 × 0.28 = $1,517/month

36% back-end: $5,417 × 0.36 = $1,950 total - $350 debt = $1,600/month

Limiting factor: $1,517/month (front-end)

Breakdown:

• PITI: $1,517
• Taxes/Insurance/HOA: -$400
• Available P&I: $1,117

With 7% rate, 30 years:

• Maximum loan: ~$168,000

Purchase prices by down payment:

• 20% down: $210,000 home
• 10% down: $187,000 home
• 5% down: $177,000 home

Recommendation: Target $180,000-200,000 homes with 10-15% down. Maintain emergency fund.

Example 2: Couple, Strong Income, High Debt

Profile:

• Combined income: $140,000/year ($11,667/month)
• Existing debt: $2,100/month
  • Car 1: $550
  • Car 2: $600
  • Student loans: $850
  • Credit cards: $100
• Credit scores: 740/720
• Saved: $45,000

Affordability Calculation:

28% front-end: $11,667 × 0.28 = $3,267

36% back-end: $11,667 × 0.36 = $4,200 - $2,100 debt = $2,100

Limiting factor: $2,100/month (back-end)

Big problem: Debt consuming $2,100/month reduces home buying power significantly!

Option 1: Buy Now

• Max housing: $2,100
• Taxes/Insurance: -$450
• P&I: $1,650
• Max loan: ~$247,000
• With 15% down: $290,000 home

Option 2: Pay Off Debt First (Recommended)

• Pay off cars (18 months aggressive)
• Now debt: $950/month
• New back-end: $3,250 housing
• P&I available: $2,800
• Max loan: ~$420,000
• With 20% down: $525,000 home

Recommendation: Delay purchase 18 months, aggressively pay off cars, then buy. Gain $235,000 in buying power!

Example 3: High Earner, Expensive Market

Profile:

• Income: $200,000/year ($16,667/month)
• Location: High cost area (SF Bay Area)
• Minimal debt: $200/month
• Credit score: 780
• Saved: $150,000

Standard Calculation:

28% front-end: $16,667 × 0.28 = $4,667

In expensive market, may stretch to 35%: $16,667 × 0.35 = $5,833

Breakdown:

• Total: $5,833
• Taxes (high in CA): -$1,200
• Insurance: -$200
• HOA: -$400
• P&I: $4,033

7% rate, 30 years: Maximum loan: ~$605,000

With 20% down ($151,250): Maximum home: $756,250

Reality in SF:

• Median home price: $1.2M
• Still can't afford median
• Would need 40% of income (very risky)

Recommendation:

• Target $700,000-800,000
• Consider condo vs. single-family
• Or rent and invest until earning more
• Or relocate to lower-cost area

Key Takeaways

✓ Use 28/36 rule as starting point: 28% front-end, 36% back-end

✓ Calculate your true number: Consider all costs, not just mortgage

✓ Be conservative: Use 25% rule instead of 28% for safety buffer

✓ Include hidden costs: Taxes, insurance, maintenance, utilities

✓ Pay down debt first: Dramatically increases buying power

✓ Save 20% down: Eliminates PMI, lowers payment, saves thousands

✓ Don't max out approval: Lenders approve maximum, not comfortable

✓ Leave room for life: Don't become house poor

Conclusion

Determining how much house you can afford isn't just about what a lender will approve—it's about what fits comfortably in your overall financial plan. Use the 28/36 rule as a starting point, but consider your complete financial picture, lifestyle goals, and the true costs of homeownership.

Being conservative with your home purchase leaves room for emergency savings, retirement contributions, travel, and quality of life. It's better to buy less house and have financial flexibility than to stretch to the maximum and be stressed about money constantly.

Use our home affordability calculator to model different scenarios based on your income, debt, and down payment to find your sweet spot.

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• First-Time Home Buyer Guide 2026