"How much can I afford?" is the first question every home buyer asks. Lenders will tell you one number. Financial advisors might say another. And your gut probably has its own opinion.

Here's how to calculate what you can actually afford—not just what you can technically qualify for.

The Short Answer

Conservative rule: 2.5-3× your annual income

Stretch rule: 4-5× your annual income

If you earn $100,000/year:

• Conservative: $250,000-$300,000 home
• Stretch: $400,000-$500,000 home

But these are starting points. The real answer depends on your debt, down payment, local taxes, and lifestyle priorities.

What Lenders Look At

Lenders use two primary ratios to determine how much they'll lend:

Front-End Ratio (Housing Ratio)

Housing costs ÷ Gross monthly income ≤ 28%

Housing costs include:

• Principal and interest
• Property taxes
• Homeowner's insurance
• HOA fees
• PMI (if applicable)

Example:

• Gross income: $8,000/month
• Maximum housing payment: $8,000 × 28% = $2,240/month

Back-End Ratio (DTI - Debt-to-Income)

All monthly debt ÷ Gross monthly income ≤ 36-43%

All debt includes:

• Housing costs (above)
• Car payments
• Student loans
• Credit card minimums
• Other loan payments

Example:

• Gross income: $8,000/month
• Current debt payments: $500/month
• Maximum total debt: $8,000 × 43% = $3,440
• Maximum housing: $3,440 - $500 = $2,940/month

Maximum Loan Based on Payment

Once you know your maximum payment, work backward to loan amount:

At 7% interest, 30-year term:

• $2,000/month payment → ~$300,000 loan
• $2,500/month payment → ~$375,000 loan
• $3,000/month payment → ~$450,000 loan

Add your down payment to get maximum home price.

Income-Based Home Price Guidelines

These assume:

• 20% down payment
• Good credit (740+)
• Minimal other debt
• Average property taxes/insurance

What Lenders Approve vs. What You Can Afford

Warning: Lenders often approve more than you should spend.

A lender might approve you for $500,000 because you technically qualify under their ratios. But that doesn't mean you should buy a $500,000 house.

Why lender maximums are risky:

• Uses gross income (you live on net)
• Doesn't account for retirement savings
• Ignores variable expenses (kids, medical, etc.)
• Assumes you want to dedicate maximum to housing
• Doesn't consider job security

More realistic approach:

Use 25-28% of your net (take-home) income for housing, not 28-43% of gross.

Factors That Affect Affordability

Interest Rates

Every 1% rate increase reduces your buying power by ~10%:

At 8% vs. 5%, the same payment buys ~27% less house.

Property Taxes

Property taxes vary dramatically by location:

A $400,000 home in New Jersey costs $8,800/year more in taxes than the same price in Hawaii. That's $733/month difference!

Hidden Costs of Homeownership

Your mortgage payment isn't your total cost. Budget for:

One-time costs:

• Closing costs: 2-5% of price
• Moving expenses
• Initial repairs/updates
• Furniture and appliances

Ongoing costs:

• Maintenance: 1-2% of home value annually
• Utilities (often higher than renting)
• HOA fees
• Lawn care/snow removal
• Higher insurance than renters policy

Example: $400,000 home

• Mortgage payment: $2,661
• Property taxes: $500
• Insurance: $150
• PMI: $150
• Maintenance reserve: $400
• Utilities increase: $150
• True monthly cost: $4,011

That's 50% more than the mortgage alone.

Key Takeaways

• Conservative guideline: 2.5-3× annual income
• Lender maximums (28/43% ratios) are often more than you should spend
• Use net income, not gross, for realistic budgeting
• Interest rates dramatically affect buying power
• Property taxes and insurance vary widely by location
• True housing cost is 30-50% more than the mortgage payment
• Your life stage and goals should influence affordability decisions

The house you can afford isn't just a math problem—it's a lifestyle choice. Being "house poor" with a beautiful home and no money for anything else isn't winning. Buy what you can comfortably afford and leave room for the rest of your life.