Start with your debt-to-income ratio, not the lender's maximum

The largest loan a lender will offer you is almost always larger than the largest loan you should take. Lenders use a debt-to-income ratio — the percentage of your gross monthly income that goes to debt payments — to decide how much to lend. Most will go up to 43 percent, meaning if you earn $5,000 a month, they will lend you enough that your total monthly debt (mortgage, car loans, credit cards, student loans, everything) hits $2,150.

That 43 percent is a ceiling for lending, not a recommendation for living. A mortgage that takes 43 percent of your income leaves little room for property taxes, insurance, maintenance, utilities, food, or emergencies. Most financial advisors suggest keeping your housing payment alone — just the mortgage, not taxes or insurance — to 28 percent of gross income or less. That is roughly half what lenders will allow.

The gap between what you can borrow and what you can afford to repay is where most people get into trouble. Start by calculating what you actually earn, what you actually owe, and what payment would leave you breathing room.

Key Takeaways

  • Lenders typically allow a debt-to-income ratio of 43 percent, but financial advisors recommend keeping your mortgage payment to 28 percent of gross income or less.
  • Your down payment size directly affects your loan amount — a 20 percent down payment on a $300,000 house means borrowing $240,000, while a 3 percent down payment means borrowing $291,000.
  • Your interest rate, loan term, and credit score all change your monthly payment on the same loan amount, so getting pre-approved shows you the real number you can afford.
  • Property taxes, homeowners insurance, and HOA fees are not part of the mortgage payment but are part of your actual housing cost, and they vary widely by location.
  • A larger down payment reduces your loan amount, lowers your monthly payment, and eliminates the need for mortgage insurance on conventional loans.

Calculate your maximum monthly payment based on your income

Start with your gross monthly income — the number before taxes, not what hits your bank account. If you earn $60,000 a year, your gross monthly income is $5,000. Multiply that by 0.28 to find the maximum you should spend on housing: $1,400 per month.

That $1,400 needs to cover your mortgage payment, property taxes, homeowners insurance, and mortgage insurance if you are putting down less than 20 percent. It does not include utilities, maintenance, or HOA fees, which come from the rest of your budget. If you have significant other debt — car loans, student loans, credit cards — subtract those monthly payments from your $1,400 first. A $300 car payment leaves you $1,100 for housing.

Once you know your target monthly payment, you can work backward to find the loan amount. A mortgage calculator (available free from most banks and from sites like Bankrate or NerdWallet) will show you what loan size produces that payment at your expected interest rate and loan term.

Understand how down payment size changes what you can borrow

Your down payment is the cash you bring to closing. The rest is borrowed. If you want to buy a $300,000 house and put down $60,000 (20 percent), you borrow $240,000. If you put down $9,000 (3 percent), you borrow $291,000. The larger loan means a larger monthly payment, even though you are buying the same house.

Down payments below 20 percent trigger private 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, added to your monthly payment. On a $291,000 loan, that is roughly $120 to $240 extra each month. You can remove PMI once you reach 20 percent equity in the home, but that takes years of payments.

A larger down payment also means you borrow less, so your monthly payment is lower even before PMI is factored in. If you have the cash available, putting down more than the minimum (3 percent for FHA loans, 3 to 5 percent for conventional loans) directly increases the size of loan you can afford on your target monthly payment.

Get pre-approved to see your actual rate and real monthly payment

Pre-approval is when a lender reviews your credit, income, and debts and tells you the interest rate and loan amount they will offer you. This is different from a pre-qualification, which is just an estimate based on what you tell them. Pre-approval takes a few days and involves submitting pay stubs, tax returns, and bank statements, but it shows you the real number.

Your interest rate depends on your credit score, the size of your down payment, the loan term (15 years versus 30 years), and current market rates. A borrower with a 750 credit score putting down 20 percent on a 30-year loan might get 6.5 percent, while a borrower with a 620 score putting down 5 percent might get 7.8 percent. That difference changes your monthly payment by hundreds of dollars on the same loan amount.

Pre-approval also locks in your rate for a set period (usually 45 to 60 days), so you know exactly what you will pay if you find a house and close within that window. This is the number to use when deciding how much house you can afford — not a calculator estimate, but the actual rate your actual lender will charge you.

Account for taxes, insurance, and maintenance costs beyond the mortgage

Your mortgage payment is only part of your housing cost. Property taxes vary dramatically by location — from under 0.5 percent of home value per year in some states to over 2 percent in others. A $300,000 house in a low-tax state might have $1,500 in annual property tax; the same house in a high-tax state might have $6,000. That is $125 versus $500 per month.

Homeowners insurance also varies by location, home age, and what you insure. Most people pay $800 to $1,500 per year, or $65 to $125 per month. If you put down less than 20 percent, add PMI on top of that. If the home is in a flood zone or high-risk area, add flood insurance.

Maintenance and repairs are not a monthly payment, but they are a real cost. Most advisors suggest budgeting 1 percent of your home's value per year for upkeep — $3,000 per year on a $300,000 house, or $250 per month. A new roof, foundation work, or major plumbing repair can cost thousands in a single year. If you are stretching to afford the mortgage payment itself, you have no cushion for these costs.

Know the difference between what you can borrow and what you can afford

A lender will tell you the maximum loan amount based on your income and debts. That number is designed to be safe for the lender, not comfortable for you. If you borrow the maximum, you are betting that your income stays stable, your interest rate does not rise (on adjustable-rate mortgages), and nothing expensive breaks.

A more sustainable approach is to borrow 80 to 85 percent of the maximum the lender offers. If a lender says you can borrow $400,000, consider borrowing $320,000 to $340,000 instead. This leaves room for property taxes and insurance to be higher than you expected, for maintenance emergencies, for a job change, or for a period of reduced income. It also means you build equity faster and pay less interest over the life of the loan.

The house you can afford is not the most expensive house a lender will finance. It is the house whose total monthly cost — mortgage, taxes, insurance, PMI, and a cushion for maintenance — fits comfortably in your budget without crowding out savings, retirement contributions, or other financial goals.

Frequently Asked Questions

What credit score do I need to get approved for a mortgage?

Most conventional lenders require a credit score of 620 or higher, though scores of 740 and above typically get better interest rates. FHA loans allow scores as low as 580. Your score is one factor among many — lenders also look at your income, debts, down payment, and employment history.

Should I get a 15-year or 30-year mortgage?

A 15-year mortgage has a higher monthly payment but you pay far less interest over time. A 30-year mortgage has a lower monthly payment, leaving more room in your budget for other goals. The right choice depends on whether your priority is paying off the house faster or keeping monthly costs low. Neither is wrong — it depends on your situation.

Can I afford a house if I have student loan debt?

Yes, but your student loan payments count toward your debt-to-income ratio. If you owe $300 per month on student loans and earn $5,000 gross per month, lenders will count that $300 when calculating how much mortgage you can carry. Paying down student loans before buying can increase the mortgage amount you may have access to for.

What happens if interest rates go up after I get pre-approved?

Your pre-approval locks in a rate for 45 to 60 days. If rates rise after that period ends and you have not closed, you will need a new pre-approval at the higher rate. This is why it is important to find a house and move toward closing within your pre-approval window.

Is it better to put down 20 percent or the minimum down payment?

Twenty percent eliminates PMI and lowers your monthly payment, but it requires more cash upfront. If putting down 20 percent means delaying your purchase for years while you save, a smaller down payment may make sense — you can always refinance and remove PMI once you reach 20 percent equity. The right choice depends on how long you plan to stay in the home and whether you have other financial goals.