A lender will tell you the most you can borrow. That number answers a different question from the one you care about, which is how much you can spend on a home and still live comfortably. This guide explains how lenders arrive at their number, how to find your own, and the costs that do not appear in the mortgage payment.
How lenders decide: the 28/36 rule
Most conventional lenders use two debt-to-income ratios, both measured against your gross monthly income, before tax.
- Front-end ratio, about 28%: your total housing payment, meaning principal, interest, property tax, homeowners insurance, mortgage insurance and HOA fees.
- Back-end ratio, about 36%: the housing payment plus every other monthly debt payment, such as car loans, student loans, credit card minimums and child support.
The lower of the two limits sets your budget. Government-backed loans allow more: FHA loans commonly go to about 31% and 43%, and lenders can stretch further with strong credit or large savings. Those higher limits are what you may qualify for, not what will feel comfortable.
A worked example
On a 100,000 dollar salary, 8,333 dollars a month before tax, 28% allows about 2,333 dollars for housing. With 400 dollars a month of other debts, the 36% limit allows 2,600, so the 28% limit is the one that binds. With a 50,000 dollar down payment and a 6.5% rate, and allowing for property tax and insurance, that housing budget supports a home of about 349,000 dollars.
Now change two things:
- Your debts. With 1,200 dollars a month of car and student loans instead of 400, the 36% limit takes over and the budget drops to about 275,000 dollars. Paying off a car loan before you apply can raise your budget more than a pay rise would.
- The rate. At 5.5% instead of 6.5%, the same income supports about 378,000 dollars. Improving your credit score before you apply is worth real money.
The home affordability calculator runs this calculation with your own numbers and shows which limit applies to you.
Lender maximum versus your budget
The ratios ignore everything else you spend money on: childcare, saving for retirement, travel, a car that will need replacing. A family that saves 15% for retirement and has young children may be comfortable at 25% of gross income on housing, not 28%. Work out what you spend now, add the new housing cost, and see what is left. If the answer makes you nervous, aim for the lower figure.
The down payment
Twenty percent down avoids private mortgage insurance on a conventional loan, but it is not required. Some conventional programs accept 3% down, FHA loans 3.5% with a qualifying credit score, and VA and USDA loans can require nothing down for eligible buyers. A smaller down payment means a bigger loan and usually mortgage insurance: Freddie Mac estimates roughly 30 to 70 dollars a month for every 100,000 dollars borrowed. On a conventional loan it can be removed once you reach 20% equity.
Do not empty your savings to reach 20%. Keeping several months of expenses in reserve matters more than avoiding mortgage insurance, because a new home almost always brings unexpected costs.
Costs beyond the mortgage payment
- Closing costs, typically 2 to 5% of the price, paid on top of the down payment.
- Maintenance. A common allowance is 1% of the home's value a year, more for older homes. A new roof, a boiler or a water heater can arrive in the first year.
- Utilities, often higher than in an apartment, especially for heating and cooling a house.
- Moving and furnishing, which first-time buyers routinely underestimate.
- Property tax rises after a sale, when the home is reassessed at the price you paid.
A sensible process
- Check your credit report and fix any errors months before you apply.
- Use the affordability calculator at the comfortable level to set a price ceiling.
- Get a lender pre-approval to confirm what you qualify for.
- House hunt below the lower of the two numbers, leaving room for closing costs and repairs.
- Before making an offer, run the specific home's taxes, insurance and HOA through the mortgage calculator.
Estimates only, not financial advice. A lender pre-approval is the only way to know exactly what you qualify for.