Start with your gross monthly income

The most common way to think about affordability is the debt-to-income ratio, or DTI. This is the percentage of your monthly income (before taxes) that goes toward debt payments. Most lenders will not offer you a mortgage if your total monthly debt payments — including the new mortgage — exceed 43% of your gross monthly income.

Here is how to calculate it. Take your gross monthly income (your pay before taxes are taken out). Multiply it by 0.43. That number is the maximum total debt payment most lenders will allow you to carry. Subtract what you already pay each month on car loans, student loans, credit cards, and other debts. What remains is roughly the maximum mortgage payment a lender will consider.

Example: If you earn $5,000 gross per month, 43% is $2,150. If you already pay $400 on a car loan and $200 on student loans, you have $1,550 left for a mortgage payment. That $1,550 would need to cover the loan payment itself, property taxes, homeowners insurance, and mortgage insurance if you put down less than 20%.

Key Takeaways

  • Most lenders use a 43% debt-to-income ratio as the ceiling, meaning your total monthly debt payments (including the new mortgage) should not exceed 43% of your gross monthly income.
  • Your actual mortgage payment must also cover property taxes, homeowners insurance, and possibly mortgage insurance, so the loan amount itself is smaller than your total payment budget.
  • A down payment of 20% or more removes the mortgage insurance requirement, which can lower your monthly payment by several hundred dollars.
  • Your credit score, savings history, and employment stability all affect what payment amount a lender will actually offer you, even if the math says you could afford more.

Account for taxes, insurance, and mortgage insurance

Your mortgage payment is not just the loan repayment. It also includes property taxes, homeowners insurance, and possibly private mortgage insurance (PMI). PMI is a monthly fee lenders charge when you put down less than 20% of the home price. All of these stack into one payment.

Property taxes vary widely by location — some counties charge 0.5% of home value annually, others charge 2% or more. Homeowners insurance also varies by location, home age, and what you insure. A rough estimate: if you are borrowing $300,000 in a moderate-tax area with a 30-year loan, your payment might be $1,600 for the loan itself, plus $300 to $500 for taxes and insurance combined, plus another $150 to $300 for PMI if your down payment was under 20%.

This is why the number you can borrow is smaller than the payment budget you calculated above. If you have $1,550 available for a mortgage payment, you cannot borrow enough to make a $1,550 loan payment — you need to leave room for the other costs.

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

A lender will tell you the maximum loan amount they will offer based on your income and debts. That number is not the same as what you can actually afford to pay comfortably each month. Lenders are willing to stretch borrowers to the 43% limit because they know some people can handle it, but that does not mean you should.

Many financial advisors suggest keeping your total housing payment (mortgage, taxes, insurance, and PMI) to no more than 28% of your gross monthly income. This leaves more room for emergencies, maintenance, and other life expenses. Using the earlier example of $5,000 gross monthly income, 28% would be $1,400 — significantly less than the 43% ceiling.

The difference between what a lender will offer and what feels manageable in your actual life is real. A lender does not know your job stability, your family size, your car repair history, or whether you have savings for emergencies. You do. If the maximum payment makes you anxious, a smaller one is the right choice.

Factor in your down payment and savings

The size of your down payment changes both the loan amount and the monthly payment. A larger down payment means you borrow less, which lowers your payment. It also removes PMI if you reach 20%, which can save $100 to $300 per month depending on the loan size.

Beyond the down payment, lenders also want to see that you have savings. Most will ask for proof of reserves — money in the bank after you close the loan. This shows you can handle an unexpected repair or a month of tight cash flow. If you have little savings beyond your down payment, some lenders will offer you less, or charge a higher interest rate, even if the math says you could afford more.

This is also a practical reality: homeownership costs money beyond the payment. A roof repair, a water heater replacement, or foundation work can cost thousands. If your down payment depletes your savings entirely, you are vulnerable. Most people find that keeping 3 to 6 months of expenses in savings, separate from the down payment, makes homeownership less stressful.

Know how your credit score affects the payment you are offered

Your credit score does two things: it determines whether a lender will work with you at all, and it determines the interest rate they offer. A higher score gets a lower rate, which means a lower monthly payment on the same loan amount. A lower score gets a higher rate, which means a higher payment.

The difference is substantial. On a $300,000 loan over 30 years, a borrower with a 740 credit score might pay 6.5% interest, while a borrower with a 620 score might pay 8.5%. That is roughly $200 more per month on the same house. If you are on the edge of affordability, your credit score is the difference between yes and no.

If your score is below 620, most conventional lenders will not work with you. If it is between 620 and 680, you will pay more. If you are planning to buy within the next year or two, checking your credit report now and fixing errors or paying down high balances can raise your score and lower the payment you will be offered.

Use a mortgage payment calculator to test different scenarios

Once you have a sense of your income, debts, and down payment, a mortgage payment calculator can show you what different loan amounts actually cost per month. These calculators are free and available from most lenders' websites, from Bankrate, from the Consumer Financial Protection Bureau, and from other financial sites.

A calculator lets you change the loan amount, the interest rate, the down payment, and the loan term (15 years, 30 years, etc.) and see the payment update when ready. This is useful because it shows you the real trade-offs: a 15-year loan has a higher monthly payment but costs far less in interest over time. A larger down payment lowers the payment and removes PMI. A lower interest rate (which depends on your credit score and market conditions) can save thousands.

Use the calculator to find the payment that feels sustainable to you, then work backward to the loan amount. That loan amount, plus your down payment, is the price range you should be looking at. This approach — starting with the payment you can afford, rather than the maximum a lender will offer — is a more honest way to think about affordability.

Plan for the costs that come after you buy

Homeownership has costs beyond the mortgage payment that renters do not face. Property taxes can increase. Insurance rates rise. Maintenance and repairs are your responsibility — a roof lasts 20 to 30 years, a water heater lasts 10 to 15, and both will need replacement. Homeowners association fees, if your home has them, can increase over time.

A common rule of thumb is to budget 1% of the home's purchase price per year for maintenance and repairs. On a $400,000 home, that is $4,000 per year, or about $330 per month. This is separate from your mortgage payment. If you are already stretching to afford the payment itself, you have no cushion for these costs.

This is another reason to be conservative with your affordability calculation. The payment you can technically afford is not the same as the payment that leaves room for the realities of owning a home.

Frequently Asked Questions

What if my income is irregular or I am self-employed?

Lenders typically average your income over the past two years for self-employed borrowers, and some require three years of tax returns. If your income has been growing, this can work against you — the average may be lower than your current earnings. If it has been declining, it is worse. Some lenders specialize in self-employed borrowers and have different rules, so shopping around matters.

Can I afford a mortgage if I have student loans or credit card debt?

Yes, but the debt reduces your available payment budget. A $400 monthly student loan payment and a $200 credit card payment means $600 is already committed, so your mortgage payment budget is $600 lower than someone with no other debts. Paying down high-interest debt before buying can increase the payment you are offered.

Does the interest rate change my affordability?

Absolutely. Interest rates change based on market conditions and your credit score. A 0.5% difference in rate can change your monthly payment by $100 to $150 on a $300,000 loan. When you are shopping for a mortgage, get rate quotes from multiple lenders — the difference can be significant.

What if I want to buy a house but the payment seems too high?

Look at a less expensive home, save a larger down payment, or wait while you pay down other debts or build your credit score. These are not exciting options, but they are more honest than stretching into a payment that will stress your finances for 30 years. A smaller house you can afford comfortably is better than a larger one that keeps you anxious.

Should I use the 28% rule or the 43% rule?

The 43% rule is what lenders use to decide whether to offer you a loan. The 28% rule is what many financial advisors suggest for your own peace of mind. If you can afford 43%, that does not mean you should spend it. Use 28% as your target and treat anything above it as a stretch.