The real test: what you can borrow, what you can actually pay

Whether you can afford a house depends on two separate numbers that often don't match. A lender will tell you the maximum they'll lend you based on your income and credit score — that's your borrowing capacity. But the amount a bank will lend you is not the same as the amount you can comfortably pay back every month without running out of money for other things. That's your actual affordability, and only you can calculate it.

Most lenders use a rule called the 28/36 ratio. They'll lend you up to 28 percent of your gross monthly income (the money before taxes) toward your mortgage payment, property taxes, insurance, and homeowners association fees combined. They'll lend you up to 36 percent of your gross income toward all debt payments — mortgage, car loans, credit cards, student loans, everything. This is how much they're willing to risk, not how much you should spend.

Your actual affordability is lower. You need to account for property maintenance, utilities, groceries, transportation, childcare, medical costs, and whatever else you actually spend money on. A house that takes 28 percent of your gross income in payments might leave you unable to pay for a new roof, a car repair, or a month when you get sick and miss work.

Key Takeaways

  • Lenders will tell you a maximum loan amount based on your income and credit, but that is not the same as what you can afford to pay back while covering all your other expenses.
  • Your down payment, interest rate, and loan term all change your monthly payment — a smaller down payment or longer loan term makes the payment smaller but costs you more in interest over time.
  • Property taxes, homeowners insurance, and maintenance are not optional costs and must be included in your affordability calculation, not just the mortgage payment itself.
  • The safest approach is to calculate your monthly take-home pay, subtract all your current expenses and debts, and see what is actually left over for housing.
  • If a lender approves you for more than you think you can afford, that is normal — their job is to lend, not to know your full financial picture.

Start with your actual monthly take-home pay

Begin with the money you actually receive in your bank account each month, not your gross salary. If you earn $60,000 a year, your gross monthly income is $5,000, but after taxes, Social Security, Medicare, and any other deductions, you might take home $3,600. That $3,600 is the number that matters for affordability.

If your income varies — you work commission, freelance, or seasonal work — use your average over the last two years, or use a conservative estimate. If you're self-employed, use your net income after business expenses. Lenders will ask for tax returns to verify this, so use a number you can actually document.

Include any income that is stable and will continue: a spouse's salary, regular child support you receive, a pension, Social Security. Do not include bonuses or overtime unless you've received them consistently for at least two years and can show them on tax returns or pay stubs.

List every monthly expense and debt payment you have now

Write down what you actually spend each month on everything except housing. This includes car payments, insurance, gas, groceries, utilities, phone, internet, childcare, student loans, credit card payments, medical costs, subscriptions, and anything else that leaves your account regularly. If an expense is seasonal — car registration once a year, holiday spending, car maintenance — divide the annual cost by 12 and include that monthly average.

Be honest about what you spend, not what you think you should spend. If you spend $200 a month on coffee and dining out, write $200. If you spend $80 a month on streaming services, write $80. The goal is to see what money is actually left over, not to judge your spending.

Add up all these expenses. Subtract that total from your monthly take-home pay. The number you're left with is the maximum you have available for housing — mortgage payment, property taxes, insurance, and homeowners association fees combined. That is your real affordability ceiling.

Understand what your monthly housing payment actually includes

When you hear "your mortgage payment is $1,500," that number often refers only to principal and interest — the money that pays back the loan itself. But your actual monthly housing cost is higher. It includes:

  • Principal and interest: The payment to the lender.
  • Property taxes: Paid to your county or municipality, usually monthly as part of your mortgage payment. The amount varies by location and property value.
  • Homeowners insurance: Required by lenders, usually paid monthly as part of your mortgage payment. Costs vary by location, home age, and coverage level.
  • Mortgage insurance (PMI): Required if your down payment is less than 20 percent. This is an extra monthly fee that protects the lender if you stop paying. It goes away once you've paid down the loan to 80 percent of the home's original value.
  • Homeowners association fees: If the property is in an HOA, you pay monthly dues for common area maintenance. These are not optional and can range from $100 to $500 or more per month.

Ask the lender or real estate agent for an estimate of property taxes and insurance for the specific house you're considering. These vary dramatically by location. A $300,000 house in one county might have $400 a month in property taxes and a $150,000 house in another county might have $600 a month.

Account for maintenance and repairs you'll actually face

Renters don't pay for a new roof or a water heater. Homeowners do. The general rule is to budget 1 percent of the home's purchase price per year for maintenance and repairs. A $300,000 house should have $3,000 set aside annually, or $250 per month. Some years you'll spend less; some years you'll spend much more. A roof replacement can cost $8,000 to $15,000. A foundation repair can cost $10,000 or more.

If you don't have savings to cover a $5,000 emergency repair, you cannot afford the house. Many homeowners who can technically afford the mortgage payment end up in financial crisis when something breaks and they don't have the cash to fix it.

Set aside money for maintenance before you commit to a mortgage payment. If your available housing budget is $1,800 a month and maintenance will cost $250, your actual mortgage-plus-taxes-plus-insurance budget is $1,550.

Calculate what price house that budget actually buys

Once you know your monthly budget for housing, you can work backward to find the price range of houses you can afford. This requires knowing three things: your down payment, the interest rate you'll likely get, and the loan term (usually 30 years).

Use an online mortgage calculator and enter different home prices until the monthly payment (including taxes, insurance, and PMI if applicable) matches your budget. Start with the price you think you want, see what the payment is, and adjust from there.

A larger down payment lowers your monthly payment and eliminates PMI. If you have $60,000 saved and are looking at a $300,000 house, that's a 20 percent down payment — no PMI required. If you only have $30,000 saved, that's 10 percent down, and you'll pay PMI until you've paid the loan down to $240,000. The PMI adds roughly $150 to $300 per month depending on the loan amount and your credit score.

Interest rates change daily and depend on your credit score, down payment size, and loan term. A person with a 750 credit score might get 6.5 percent interest while someone with a 650 score gets 7.2 percent on the same loan. Over 30 years, that difference adds up to tens of thousands of dollars in extra interest paid.

The difference between what you can borrow and what you should borrow

A lender might approve you for a $400,000 mortgage based on your income. That doesn't mean you should borrow $400,000. Lenders are in the business of lending; they profit when you borrow more, not less. They have no way to know that you have aging parents you help support, or that you want to save for your kids' college, or that you're uncomfortable carrying debt.

If a lender approves you for more than your affordability calculation shows you can handle, trust your own math. You know your full financial picture. The lender knows only your income and existing debts.

A common mistake is to borrow the maximum and assume you'll "grow into it" — that your income will rise and the payment will feel easier. Income does sometimes rise, but it also sometimes doesn't. A job loss, a health crisis, or a market downturn can happen at any time. If your housing payment is already at the edge of what you can afford, there's no cushion.

Frequently Asked Questions

What if I can't afford the house I want in my area?

This is common, especially in high-cost areas. Your options are to save a larger down payment to lower the monthly payment, look at less expensive homes in the same area, consider a different location with lower prices, or wait and continue saving while renting. None of these are failures — they're realistic responses to local market conditions.

Should I use an online calculator or talk to a lender first?

Start with an online calculator to understand the relationship between price, down payment, and monthly payment. Then talk to a lender to get a pre-qualification letter, which shows sellers you're serious and gives you a realistic interest rate estimate. Pre-qualification is not the same as pre-approval and doesn't commit you to anything.

Does my credit score affect how much I can afford?

Yes. A higher credit score gets you a lower interest rate, which lowers your monthly payment on the same loan amount. The difference between a 620 score and a 760 score can be 1 to 2 percentage points in interest rate, which translates to $100 to $300 per month on a typical mortgage. If your score is below 650, improving it before applying can save you significant money.

What if I have student loans or other debts?

Lenders count your debt payments toward the 36 percent debt-to-income ratio. If you have $400 in student loan payments and $200 in car payments, that's $600 in debt that reduces how much mortgage payment the lender will approve. Your actual affordability is affected the same way — those payments come out of your take-home pay before housing money is available.

Is it better to put down 20 percent to avoid PMI?

It depends on your situation. A 20 percent down payment eliminates PMI and lowers your monthly payment, but it also means tying up more cash upfront. If you have $100,000 saved and are buying a $400,000 house, putting down $80,000 (20 percent) leaves you with only $20,000 in emergency savings — a risky position. Putting down $60,000 (15 percent) and keeping more cash in reserve might be smarter even though you'll pay PMI for a few years.