How Much House Can I Afford?
Three time-tested rules for sizing a home purchase to your income, plus the debts and costs most buyers forget to count.
Most buyers can size a purchase with the 28/36 rule: keep total housing costs at or below 28 percent of gross monthly income and all debts at or below 36 percent. A $100,000 salary supports roughly $2,333 a month in housing costs, but down payment, debts, and local taxes move the real number.
Start with the 28/36 rule
Lenders size mortgages with two ratios. The front-end ratio caps your total housing cost, called PITI (principal, interest, property taxes, homeowners insurance), at about 28 percent of gross monthly income. The back-end ratio caps PITI plus all other monthly debts, car loans, student loans, minimum credit card payments, at about 36 percent.
On a $100,000 salary, gross monthly income is $8,333. Twenty-eight percent is $2,333 for housing; 36 percent is $3,000 for housing plus all debts. If you already pay $600 a month in car and student loans, your housing budget under the back-end ratio is $2,400. The tighter of the two ratios is the one that binds.
These are guidelines, not laws. Some loan programs stretch the back-end ratio toward 45 or even 50 percent for strong borrowers, but every point of stretch buys risk: less room for repairs, rate resets, or income shocks.
The 3x income shortcut
A rougher rule says buy a home worth about three times your gross annual income. On $100,000, that is a $300,000 house. The shortcut assumes a 20 percent down payment and typical rates; it breaks down when rates are very high or very low.
Use it as a sanity check, not a budget. Run your actual numbers through the mortgage calculator above, then add taxes and insurance, before you fall in love with a listing.
Count PITI, not just principal and interest
First-time buyers routinely budget for the mortgage payment and forget the rest. Property taxes can add several hundred dollars a month in high-tax states. Homeowners insurance adds more. With less than 20 percent down, PMI adds 0.5 to 1 percent of the loan amount per year.
A $400,000 house with 10 percent down at 6.5 percent has principal and interest of about $2,275 a month. Add $400 in taxes, $150 in insurance, and $180 in PMI, and the real payment is about $3,005. Budget the full PITI or the house will feel 30 percent more expensive than you planned.
Debts that shrink your budget
Lenders count minimum monthly payments, not balances. A $400 minimum student loan payment cuts your borrowing power by roughly $80,000 to $100,000 in home price at typical rates. Carrying a big car payment into a mortgage application is the most common self-inflicted wound in home buying.
Pay down revolving debts before you apply. The back-end ratio rewards every dollar of minimum payment you eliminate, and a lower utilization ratio can lift your credit score, which can lower your rate.
A worked example
Take a buyer earning $120,000 with $700 in monthly debts and $60,000 saved. Gross monthly income is $10,000. The front-end cap is $2,800 for housing; the back-end cap is $3,600 minus $700 in debts, or $2,900. Housing budget: about $2,800 to $2,900 a month.
At 6.5 percent for 30 years, $2,800 a month in principal and interest supports roughly a $443,000 loan. Add the $60,000 down payment and subtract taxes and insurance of, say, $500 a month, and the realistic price lands near $430,000 to $450,000. That is the honest number to shop with.
Skip the arithmetic
Plug your target price into the free mortgage calculator to see the monthly payment it creates.
Affordability questions
What is the 28/36 rule?
Keep total housing costs (principal, interest, taxes, insurance) at or below 28 percent of gross monthly income, and keep all monthly debts including housing at or below 36 percent. Lenders use these two ratios to decide how much mortgage you can carry.
How much house can I afford on $100k?
Under the 28 percent rule, $100,000 of income supports about $2,333 a month in total housing costs. At typical rates with 20 percent down, that covers principal and interest on a home in the low-to-mid $300,000s, less once property taxes and insurance are included.
Does my down payment change what I can afford?
Yes, in two ways. A bigger down payment shrinks the loan amount, which shrinks the monthly payment directly. And crossing 20 percent down eliminates PMI on a conventional loan, which can save $100 to $300 a month on a typical purchase.