Start with your debt-to-income ratio, not just your down payment

Most lenders will not lend you more than 43 percent of your gross monthly income toward all debt payments combined — mortgage, car loans, credit cards, student loans, everything. This is called your debt-to-income ratio or DTI. It is the single most reliable number for figuring out what you can afford, because it accounts for your actual ability to pay, not just how much house exists in your price range.

To find your maximum mortgage payment, multiply your gross monthly income by 0.43, then subtract all other monthly debt payments. What remains is the most a lender will typically allow you to spend on housing. For example, if you earn $5,000 gross per month and have $300 in car and student loan payments, your maximum housing payment is ($5,000 × 0.43) − $300 = $1,850.

Some lenders use a stricter 36 percent ratio for housing alone, which gives you a smaller number. Ask your lender which ratio they use before you start house hunting, because it changes what price range is actually within reach.

Key Takeaways

  • Your debt-to-income ratio — typically 43 percent of gross monthly income minus other debts — determines what lenders will offer you, not the price of houses on the market.
  • Your down payment size affects your monthly payment and whether you pay mortgage insurance, but does not change the total amount a lender will lend you.
  • Interest rates, loan term, property taxes, and homeowners insurance all change your actual monthly cost, so get a pre-qualification estimate from a lender before you make an offer.
  • Your credit score affects the interest rate you receive, which can add or subtract hundreds of dollars per month over the life of the loan.
  • What you can afford to borrow is different from what you can afford to live with — a smaller mortgage leaves room for repairs, property taxes, and life changes.

How your down payment size changes the monthly payment

The larger your down payment, the smaller your monthly mortgage payment, because you are borrowing less. A 20 percent down payment also eliminates private mortgage insurance (PMI), which is an extra monthly fee lenders charge when you put down less than 20 percent. PMI typically costs 0.5 to 1.5 percent of the loan amount per year, divided into your monthly payment.

If you are buying a $300,000 house with 10 percent down ($30,000), you are borrowing $270,000. With PMI, your monthly insurance cost might be $135 to $405 depending on your credit score and the lender. With 20 percent down ($60,000), you borrow $240,000 and pay no PMI. The difference in monthly payment is substantial, but the lender will still lend you the same total amount based on your DTI — the down payment just changes how much of that you actually use.

If you cannot save 20 percent, borrowing with PMI is still a real option. Some buyers pay PMI for a few years, then refinance once they have built equity. Others accept PMI as the cost of buying sooner. The key is knowing the exact monthly cost before you commit.

Interest rates and loan terms reshape what you actually pay

A 1 percent difference in interest rate changes your monthly payment by roughly $100 per $100,000 borrowed. On a $300,000 mortgage, the difference between a 6 percent and 7 percent rate is about $300 per month — $3,600 per year. Over 30 years, that is more than $100,000 in extra payments.

Your credit score determines what interest rate you receive. Scores above 740 typically get the best rates; scores below 620 may not may have access to for conventional loans at all. If your score is lower than you want, paying down credit card balances or waiting a few months to improve your score can save you tens of thousands over the life of the loan.

Loan term also matters. A 15-year mortgage has a lower interest rate than a 30-year mortgage, but your monthly payment is much higher because you are paying back the money faster. A 30-year mortgage at 6.5 percent on $240,000 costs roughly $1,520 per month; the same loan over 15 years costs roughly $1,850 per month. Choose the term based on what monthly payment fits your budget, not on what sounds shorter.

Property taxes and insurance are part of your actual monthly cost

Your mortgage payment is not your only housing cost. Property taxes vary widely by location — from less than 0.5 percent of home value per year in some states to over 2 percent in others. A $300,000 house in a high-tax area might cost $500 per month in property taxes alone; in a low-tax area, it might cost $125.

Homeowners insurance typically costs $800 to $1,500 per year depending on the house, your location, and the insurer. In high-risk areas (flood zones, wildfire zones, hurricane zones), it can be much higher. These costs are often rolled into your mortgage payment as part of your escrow account, so they count toward your total monthly housing expense.

When you calculate what you can afford, add property taxes and insurance to your mortgage principal and interest. A lender will do this for you in a pre-qualification estimate, but you can also research your local tax rate and get an insurance quote yourself before you start looking at houses.

Get a pre-qualification estimate before you house hunt

A pre-qualification is a conversation with a lender where you tell them your income, debts, and credit score, and they tell you roughly what they will lend you and at what rate. It takes 15 to 30 minutes and costs nothing. Most lenders offer it online or by phone.

The pre-qualification includes an estimate of your monthly payment with property taxes and insurance included. This number is more realistic than any calculator, because it reflects your actual credit score and the rates your lender is currently offering. Write down the monthly payment, not just the loan amount — the payment is what you actually have to budget for each month.

A pre-qualification is not a promise to lend you money. It is an estimate based on the information you provided. A full pre-approval (which requires documentation like pay stubs and tax returns) is more binding, but a pre-qualification is enough to know whether you are looking at $200,000 houses or $400,000 houses.

The difference between what you can afford and what you should spend

Just because a lender will lend you $400,000 does not mean you should borrow $400,000. Lenders use the 43 percent DTI rule because it is the maximum they are willing to risk, not because it leaves you comfortable. If your entire housing payment is 43 percent of your income, you have little room for a job loss, a medical emergency, or a major home repair.

Many financial advisors suggest keeping your housing payment to 28 percent of gross income or less, which gives you breathing room. At $5,000 gross monthly income, that is $1,400 per month instead of $2,150. The difference feels small until your roof needs replacing or your hours get cut at work.

Consider also what happens after you buy. Homeowners pay for repairs, maintenance, property tax increases, and insurance increases. A mortgage payment that leaves you with no cushion is a mortgage you cannot actually afford to keep.

Frequently Asked Questions

Does my student loan debt count toward my debt-to-income ratio?

Yes. Lenders count all monthly debt payments — student loans, car loans, credit cards, child support, and any other obligation — toward your DTI. If you are in school deferment or forbearance, lenders may count a calculated payment instead of zero. Ask your lender how they will treat your specific loans.

What if I have no credit history or a very low credit score?

Conventional loans typically require a credit score of at least 620. If yours is lower, you may still have options through FHA loans (which allow scores as low as 500 with a larger down payment) or through credit unions, but your interest rate will be higher. Improving your score before you apply can save you thousands in interest.

Can I afford a house if I am self-employed?

Yes, but lenders require more documentation. They typically average your income over two years and may ask for tax returns, profit-and-loss statements, and bank statements. Some lenders are stricter than others, so shop around. Self-employed borrowers often may have access to for smaller loans relative to their actual income because of this documentation requirement.

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

Use both. Online calculators show you the general range based on assumptions about interest rates and taxes. A lender's pre-qualification shows you what you actually may have access to for at current rates in your area. The lender's number is more accurate because it includes your real credit score and real local costs.

What if I want to buy a house but my debt-to-income ratio is too high?

You have three options: increase your income, decrease your other debts, or wait. Paying off credit cards or car loans before you apply can lower your DTI significantly. Some people work a second job or side income for six months to a year before applying. Others wait until a car loan or student loan is paid off. The lender's number will not change until your actual financial situation does.