Start with what you actually have: your down payment and monthly budget

You can afford a house when you have enough money saved for a down payment and your monthly housing costs fit inside your actual take-home pay. That's it. Everything else flows from those two numbers.

Most lenders want to see a down payment of 3 to 20 percent of the home's price, depending on the loan type. A house that costs $300,000 with a 10 percent down payment means you need $30,000 in cash before you start. If you don't have that saved, you cannot buy yet—not because you're doing something wrong, but because you're not ready. Saving more first is the honest path.

Your monthly housing costs should not exceed 28 percent of your gross monthly income (the money before taxes). If you bring home $5,000 a month before taxes, your housing payment should stay under $1,400. This includes your mortgage payment, property taxes, homeowners insurance, and HOA fees if they apply. Lenders check this number because people who spend more than that on housing tend to fall behind on other bills or the mortgage itself.

Key Takeaways

  • You need a down payment saved before you start shopping—typically 3 to 20 percent of the home price, depending on loan type.
  • Your total monthly housing costs should not exceed 28 percent of your gross income, which lenders verify before approving a mortgage.
  • Your total debt payments (housing plus car loans, credit cards, student loans) should stay under 36 percent of gross income, or lenders will deny you.
  • A mortgage pre-qualification letter from a lender tells you the actual price range you can borrow for, based on your income and debts.
  • Buying a house costs money beyond the down payment—closing costs, inspections, appraisals—so budget an extra 2 to 5 percent of the home price.

Calculate your debt-to-income ratio before you look at houses

Lenders look at more than just housing costs. They add up all your monthly debt payments—car loans, credit cards, student loans, personal loans—and compare that total to your gross income. This number is called your debt-to-income ratio, and it cannot exceed 36 percent for most mortgages.

Here's how to calculate it: Add up every monthly debt payment you make. Include the minimum payment on credit cards, your car loan, student loans, and any other loans. Then divide that total by your gross monthly income (before taxes). If you earn $5,000 a month before taxes and your total debt payments are $1,200, your ratio is 24 percent—well within the limit.

The 28 percent housing rule and the 36 percent total debt rule work together. You might have room for a $1,400 housing payment (28 percent of $5,000), but if you already owe $1,000 a month on other debts, lenders will only approve you if your housing payment stays under $800 (keeping your total at 36 percent). This is why paying off credit cards or car loans before buying a house can make a real difference in how much you can borrow.

Get a pre-qualification letter to see what lenders will actually offer you

Your own math is a starting point, but a lender's pre-qualification letter is the real answer. This letter tells you the actual loan amount a bank or mortgage company is willing to give you, based on your income, debts, credit score, and down payment.

To get pre-may have access to, contact a mortgage lender—a bank, credit union, or mortgage broker—and provide recent pay stubs, tax returns, and a list of your debts. The lender will pull your credit report and run the numbers. Within a few days, you'll have a letter stating something like "We will lend you up to $250,000." That letter is what you show to real estate agents and sellers. It proves you're serious and that the money exists.

Pre-qualification is not the same as pre-approval. Pre-qualification is quick and based on what you tell the lender. Pre-approval is more thorough—the lender verifies your documents and checks your credit more carefully. Pre-approval takes longer but carries more weight with sellers. Either way, the letter shows you the actual ceiling on what you can borrow, which is far more useful than guessing.

Account for the costs that come before and after the down payment

The down payment is not the only money you need. Closing costs—the fees lenders, title companies, and inspectors charge—typically run 2 to 5 percent of the home's purchase price. On a $300,000 house, that's $6,000 to $15,000 in addition to your down payment.

Before closing, you'll also pay for a home inspection (usually $300 to $500), an appraisal (usually $400 to $600), and a credit report pull (usually $50 to $100). Some of these fees are refundable if you walk away before closing; others are not. Ask the lender upfront which costs you'll lose if the deal falls through.

After you buy, budget for maintenance and repairs. Older homes need more; newer homes need less. A general rule is to set aside 1 percent of the home's value each year for repairs, though this varies widely. A $300,000 house might need $3,000 a year in maintenance, or it might need nothing for three years and then $10,000 in one year. This is separate from your mortgage payment and property taxes, but it's a real cost of owning.

Check your credit score and fix obvious problems before applying

Lenders use your credit score to decide whether to approve you and what interest rate to offer. A score of 620 or higher opens doors to most mortgages; 740 or higher gets you better rates. You can check your own score free at annualcreditreport.com or through your bank's website.

If your score is lower than you expected, look at your credit report for errors—accounts that aren't yours, payments marked late that you made on time, or old debts that should have fallen off. You can dispute errors with the credit bureau for free. Fixing a clear mistake can raise your score by 50 to 100 points in a few months.

If your score is low because you have recent late payments or high credit card balances, you have two options: wait and let time pass (late payments hurt less as they age), or pay down your credit card balances before applying (this lowers your debt-to-income ratio and can raise your score). Either way, don't apply for new credit cards or loans right before buying a house—new accounts lower your score and raise red flags with lenders.

Decide whether you're ready to stay in one place for at least five years

Affordability isn't just about money—it's about timing. Buying a house makes sense only if you plan to stay for at least five years. The reason is closing costs and interest. In the first few years of a mortgage, most of your payment goes to interest, not building equity. If you sell after two years, you'll owe closing costs on the sale (another 6 to 10 percent of the price), and you may not have built enough equity to cover them.

If you're unsure whether you'll stay, renting is the honest choice. Renting costs less upfront, gives you flexibility, and lets you test whether you like the neighborhood. There's no shame in renting while you save more, improve your credit, or figure out where you actually want to live long-term.

Frequently Asked Questions

What if I don't have 20 percent for a down payment?

You don't need 20 percent. Many loans accept 3 to 10 percent down. The trade-off is that you'll pay mortgage insurance (PMI)—an extra monthly fee that protects the lender if you default. PMI typically costs 0.5 to 1 percent of your loan amount per year. Once you've paid down the loan to 80 percent of the home's value, you can request to have PMI removed.

Can I afford a house if I'm self-employed?

Yes, but lenders require more paperwork. You'll need two years of tax returns and possibly profit-and-loss statements to prove your income is stable. Some lenders average your income over two years; others use the lower of the two years. Self-employment income that's growing year over year looks better to lenders than income that's flat or declining.

What happens if I get denied for a mortgage?

The lender must tell you why. Common reasons are low credit score, high debt-to-income ratio, insufficient down payment, or unstable income. You can address most of these: wait and rebuild credit, pay down debts, save more money, or provide additional documentation of income. You can also apply to a different lender—different banks have different standards.

Should I buy a house if I have student loans?

Student loans count toward your debt-to-income ratio, so they reduce how much you can borrow for a mortgage. If your student loan payments are $300 a month and you earn $5,000 gross, that's 6 percent of your income already spoken for. You still have room to borrow (the limit is 36 percent total), but less than someone without student loans. Don't avoid buying because of student loans—just factor them into your budget.

What if my income varies month to month?

Lenders want to see consistency. If you work commission or seasonal jobs, they typically average your income over the past two years. If your income is trending up, that's good; if it's trending down, lenders may use a lower number. Provide documentation—tax returns, pay stubs, offer letters—to show the lender your income is stable or growing.