Buying a home is an exciting milestone, but it can also feel overwhelming—especially when trying to figure out how much house you can actually afford. From understanding your debt-to-income ratio (DTI) to considering closing costs, down payments, and different types of loans, there’s a lot to unpack. This guide will walk you through each step, helping you gauge your financial readiness to purchase a home and showing you how to use a mortgage calculator to plan your budget effectively.
Why Does House Affordability Matter?
Determining how much house you can afford is about more than just monthly mortgage payments. A realistic affordability estimate ensures:
You don’t overextend your budget
You can comfortably manage housing-related expenses and other debts
You have enough saved for home maintenance, repairs, and emergencies
Using a mortgage affordability calculator is a great first step in this process. By inputting your financial details—like your monthly income, credit score, and estimated property taxes—you’ll get an approximate monthly mortgage payment and a suggested price range. Keep in mind that this is an estimate and not a guarantee of loan approval.
Using a Mortgage Affordability Calculator
Most mortgage calculators, including the one provided by CNET, start with basic data:
ZIP code to estimate property tax rates
Credit score to estimate mortgage interest rates
Monthly income and existing debt payments (e.g., credit cards, car loans, student loans)
By layering in regional home sales data, these calculators provide a rough monthly payment. Then, they subtract other estimated costs—like property taxes, homeowner’s insurance, and private mortgage insurance (PMI) if applicable—to give you a clearer picture of your monthly budget.
Pro Tip: If you’re more interested in seeing how your monthly payment changes with different loan amounts, use a dedicated mortgage payment calculator instead.
The 28/36 Rule: A Simple Guide to Spending Limits
When it comes to mortgages, a handy rule of thumb is the 28/36 rule:
28% of your gross monthly income (pre-tax) should be the maximum spent on housing expenses. These expenses include your mortgage principal, interest, property taxes, homeowners insurance, and private mortgage insurance (if required).
36% of your gross monthly income is the recommended upper limit for total monthly debt—including your mortgage, credit cards, car loans, and student loans.
Example:
If you earn $5,000 per month (before taxes), 28% of your income ($1,400) is a safe limit for housing costs.
You should also keep total debt payments under 36% ($1,800) of your gross monthly income.
Spending less than these thresholds—if possible—is even better for your long-term financial health.
Beyond the Mortgage: Other Upfront Costs to Consider
Even if a calculator says you can afford a certain mortgage amount, you’ll face additional home-buying costs that can impact your budget.
1. Down Payment
Typically ranges from 3% to 20% of the home’s purchase price (though some government-backed loans may require 0% down).
The more you put down, the lower your overall loan amount—and potentially, the lower your interest rate.
2. Closing Costs
Often 2% to 5% of your total mortgage amount, these include fees for appraisals, inspections, title insurance, attorney’s fees, and more.
Be prepared for these costs at the closing table.
3. Mortgage Insurance
Private Mortgage Insurance (PMI) is generally required for conventional loans if you put less than 20% down.
FHA loans require a Mortgage Insurance Premium (MIP) with upfront and annual costs.
USDA and VA loans have their own guarantee, funding, or origination fees instead of standard mortgage insurance.
4. Other Loan-Specific Fees
USDA loans have both an upfront guarantee fee and an annual fee.
VA loans require a funding fee (though it can sometimes be rolled into the loan).
Understanding Debt-to-Income (DTI) Ratio
Your DTI ratio compares your monthly debt payments to your gross monthly income. Most lenders prefer a DTI of 36% or lower for mortgage approval.
How to Calculate DTI:
Add up your monthly debt payments (e.g., credit card minimums, student loans, car loans, alimony, child support).
Divide by your gross monthly income.
Multiply by 100 to get a percentage.
Example:
Monthly income: $5,000
Debts: $250 (credit cards) + $500 (student loans) + $250 (car loan) + $1,000 (housing) = $2,000
DTI = $2,000 / $5,000 = 40%
While a 40% DTI might still work for some lenders, paying down existing debt can help improve your chances of approval and potentially secure a lower interest rate.
How Lenders Decide on Your Loan Amount
Lenders look at three main factors when determining how much you can borrow:
Income and Employment
A stable, consistent work history and sufficient monthly income reassure lenders that you can handle mortgage payments. Credit Score
Lenders pull credit reports from the three major bureaus (Equifax, Experian, TransUnion).
A higher score generally means better loan terms and lower interest rates.
Debt-to-Income Ratio
The more debt you have relative to your income, the riskier you appear to lenders.
Keeping your DTI under 36% is a good benchmark, though some loan programs allow higher DTIs.
Just because a lender approves you for a high mortgage amount doesn’t mean you need to spend it all. Opting for a smaller, more affordable mortgage can help lower your monthly payments and reduce financial stress.
Loan Options and Affordability Examples
FHA Loans
Down Payment: At least 3.5% if your credit score is 580 or above; at least 10% if below 580.
Mortgage Insurance Premium (MIP): Includes both an upfront fee (1.75% of the loan amount) and an annual fee.
Who It’s Good For: First-time homebuyers or those with lower credit scores and limited savings.
FHA Example:
Home price: $275,000
Down payment (3.5% for credit score ≥ 580): $9,625
Upfront MIP (1.75%): ~$4,644 on a $265,375 loan
Annual MIP (0.85%): ~$2,255.69 per year (added to monthly payments)
Estimated closing costs (3%): ~$5,307.50
Total upfront costs: ~$19,576.50
USDA Loans
Down Payment: 0%
Restrictions: Must be in a USDA-approved rural area and meet income limits.
Fees: 1% upfront fee and 0.35% annual fee on the loan amount.
Who It’s Good For: Moderate- to low-income buyers who prefer rural or suburban living.
USDA Example:
Home price: $275,000
Down payment: $0
Upfront fee (1%): $2,750
Annual fee (0.35%): $962.50, split into monthly payments of $80.21
Estimated closing costs (4.5%): $12,375
Total upfront costs: ~$15,125
VA Loans
Down Payment: 0%
Eligibility: Must be an active-duty service member, veteran, or spouse. Property must meet VA requirements.
Funding Fee: Typically 2.15% for first-time VA buyers with 0% down (can be higher for subsequent loans).
Mortgage Insurance: None required.
Who It’s Good For: Eligible military borrowers seeking no down payment and no PMI.
VA Example:
Home price: $275,000
Down payment: $0
VA funding fee (2.15% first-time): ~$5,912
Estimated closing costs (4%): ~$11,000
Total upfront costs: ~$16,912
Additional Homeownership Costs
Even after closing, your financial responsibilities don’t end with principal, interest, taxes, and insurance (PITI). Be sure to budget for:
HOA Fees
If your new home is in a community governed by a homeowners association or condo board, you may owe monthly, quarterly, or annual fees. Maintenance and Repairs
Experts recommend saving 1-2% of your home’s value each year for upkeep—everything from seasonal maintenance to unexpected repairs. Utility Bills
A larger home often means higher costs for electricity, heating, gas, and water.
Final Thoughts: Planning for Homeownership
Figuring out how much house you can afford is the first major step toward homeownership. Start by calculating your monthly budget, checking your credit score, and exploring different mortgage options. Remember:
The 28/36 rule offers a solid baseline for determining comfortable monthly payments.
Upfront costs—down payment, closing costs, mortgage insurance—must be factored into your budget.
Ongoing expenses like HOA fees, maintenance, and higher utility bills can add up quickly.
A lower DTI and higher credit score can help you secure a more favorable interest rate.
By using a mortgage affordability calculator and preparing for these additional expenses, you’ll be better equipped to choose a home that won’t strain your finances. With the right planning, you can move forward confidently—knowing your dream home truly fits within your budget.
Ready to take the next step?
Check your credit report for accuracy and areas of improvement.
Save for a healthy down payment, closing costs, and an emergency fund.
Get preapproved with a lender to see what loan terms you qualify for.
The more informed and prepared you are, the smoother your homebuying journey will be—and the more you’ll enjoy your new home once you’ve moved in.