Start with your debt-to-income ratio and down payment

Most lenders will not offer you a mortgage larger than 43% of your gross monthly income, after accounting for all your debts. This is called your debt-to-income ratio, or DTI. To find your maximum loan amount, add up all monthly debt payments — car loans, student loans, credit cards, child support — then divide by your gross monthly income. If that number is already above 43%, you will not may have access to for a mortgage until you pay down debt or increase income.

Your down payment is the second hard limit. If you have $40,000 saved and put down 20%, you can afford a $200,000 house. If you put down 3%, you can afford a $1.2 million house with the same $40,000 — but you will pay mortgage insurance on top of the loan, which raises your monthly cost. Most first-time buyers put down between 3% and 10%.

These two numbers — your DTI and your down payment — narrow the field before you even talk to a lender. Use them to set a realistic price range before you start house hunting.

Key Takeaways

  • Your debt-to-income ratio (all monthly debts divided by gross income) cannot exceed 43% for most mortgages, which sets a ceiling on how much you can borrow.
  • Your down payment size determines the loan amount: a larger down payment lets you buy a more expensive house with the same savings.
  • Lenders use your credit score, savings history, and employment length to decide whether to approve you at all, regardless of the DTI math.
  • The monthly payment you can afford is lower than the maximum a lender will offer, because the maximum assumes you have no other financial goals.
  • Property taxes, insurance, and HOA fees vary by location and can add hundreds to your monthly cost, so research them before you commit to a price range.

What lenders actually check before they approve you

Passing the DTI test is necessary but not enough. Lenders also look at your credit score, your savings history, and how long you have been at your current job. A credit score below 620 disqualifies you from most conventional mortgages. A score between 620 and 680 means you will pay a higher interest rate. A score above 740 gets you the best rates.

Lenders want to see that you have saved money consistently. If you have $40,000 in savings but it all arrived last month, they may ask where it came from and whether it is actually yours to use. If you have been saving $500 a month for two years, they see you as lower risk. Employment matters too: if you have been at the same job for two years or more, you are a safer bet than someone who just started.

A lender will also order a report on your payment history — whether you have missed rent, utilities, or insurance payments in the past two years. One missed payment can lower your score and cost you thousands in higher interest rates over the life of the loan.

Calculate what you can actually afford to pay each month

The maximum a lender will offer you is not the same as the maximum you should borrow. A lender cares only whether you can make the payment; they do not care whether you have money left over for groceries, car repairs, or emergencies.

Your monthly housing payment includes four things: principal and interest on the loan, property taxes, homeowners insurance, and (if your down payment is less than 20%) mortgage insurance. Together, these are called PITI plus PMI. On a $300,000 loan at current rates, the principal and interest alone might be $1,600 a month. Add $300 for property taxes, $150 for insurance, and $200 for mortgage insurance, and you are at $2,250 a month — before utilities, maintenance, or HOA fees.

A practical rule: your housing payment should not exceed 28% of your gross monthly income. If you earn $5,000 a month, that is $1,400. If you earn $7,000 a month, that is $1,960. This leaves room for other debts and for life. The 43% DTI limit is a lender's ceiling; the 28% housing limit is yours.

Research property taxes and insurance in the area you want to buy

Property taxes and insurance vary wildly by location. A house worth $400,000 might cost $200 a month in property tax in one county and $600 a month in another. Insurance for the same house might be $80 a month in a low-risk area and $200 a month in a high-risk area. These differences can add up to $400 or $500 a month — enough to change which price range you can afford.

Before you settle on a target price, look up the property tax rate in the specific neighborhoods you are considering. Your county assessor's office publishes this online. For insurance, call three or four insurers and ask for a quote on a house at your target price in your target area. Do not use national averages; use the actual numbers for the place you want to live.

If you are looking at a house in an HOA community, ask the seller or real estate agent for the HOA fee. This is a monthly or annual charge that goes toward common area maintenance. It is not optional, and it can range from $50 a month to $500 a month depending on the community.

Use an online calculator to model different scenarios

Once you know your DTI, your down payment, and the property taxes and insurance in your target area, use a mortgage calculator to see how different loan amounts translate to monthly payments. Most banks and mortgage companies offer free calculators on their websites. Enter the loan amount, the interest rate (ask a lender what rate you might may have access to for based on your credit score), the loan term (usually 15 or 30 years), and your property tax and insurance estimates.

Run the numbers for three scenarios: a conservative price (one you are confident you can afford), a middle price (what you think you want), and a stretch price (the maximum the DTI math allows). See what the monthly payment looks like at each level. This shows you the real cost of moving up in price, not just the sticker price difference.

Get pre-approved to see what a lender will actually offer

Pre-approval is different from pre-qualification. Pre-qualification is a rough estimate based on what you tell a lender. Pre-approval means a lender has checked your credit, verified your income and employment, and confirmed they will lend you a specific amount at a specific rate. It takes a few days and costs nothing.

Pre-approval tells you three things: the maximum loan amount a lender will give you, the interest rate you may have access to for, and whether there are any surprises in your financial history that will affect your borrowing. It also shows sellers that you are serious, which matters in a competitive market.

Get pre-approved before you start house hunting seriously. If the pre-approval amount is lower than you expected, you now know to adjust your price range. If it is higher, you still should not borrow the full amount — use the 28% housing payment rule instead.

Account for costs beyond the monthly payment

Your monthly payment is only part of the cost of owning a house. Budget for maintenance and repairs: a rule of thumb is 1% of the house value per year, though this varies by age and condition of the house. A $300,000 house might need $3,000 a year in maintenance. Some years it is less; some years (when the roof needs replacing) it is much more.

You will also pay closing costs when you buy — typically 2% to 5% of the purchase price. These are paid upfront and cover appraisal, title search, inspections, and lender fees. On a $300,000 house, closing costs might be $6,000 to $15,000. Some lenders allow you to roll these into the loan, but that increases your monthly payment.

If you are stretching to afford the house price itself, you have no cushion for these costs or for emergencies. A safer approach is to buy a house at the lower end of your pre-approval range, so you have money left over each month for savings and unexpected repairs.

Frequently Asked Questions

What if my credit score is below 620?

Most conventional lenders will not approve you. You may be able to work with a lender that specializes in lower credit scores, but you will pay a significantly higher interest rate. Spending three to six months paying down debt and making all payments on time can raise your score enough to may have access to for better rates.

Can I use my partner's income if we are not married?

No. Lenders require that the person on the mortgage is the one whose income counts toward the DTI calculation. If you are buying together, you can both be on the mortgage and both incomes count, but you will both be responsible for the full loan if one of you cannot pay.

Does the interest rate change after I get pre-approved?

Pre-approval locks in a rate for a set period, usually 30 to 60 days. If you close on the house within that window, you get that rate. If rates drop before you close, you can usually lock in the lower rate. If rates rise, you keep the pre-approved rate.

What happens if I put down less than 20%?

You will pay mortgage insurance (PMI), which is added to your monthly payment. PMI typically costs 0.5% to 1% of the loan amount per year. Once you have paid down the loan to 80% of the original home value, you can ask the lender to remove PMI, but you have to request it — they will not do it automatically.

Should I buy the maximum house I can afford?

No. The maximum a lender will approve is based on whether you can technically make the payment, not on whether you have money left for other goals. Most financial advisors recommend keeping your housing payment to 28% of gross income, which is lower than the lender's maximum. This leaves room for savings, emergencies, and the rest of your life.