Work backward from what you can pay each month

The fastest way to find your price range is to start with a monthly payment you can sustain, then reverse-engineer the home price. Most lenders will approve you for a mortgage if your total monthly debt payments—including the new mortgage—stay below 43% of your gross monthly income. But that ceiling is what banks will lend, not what you should borrow.

If you earn $5,000 gross per month, 43% is $2,150. Subtract your existing debts: car loans, student loans, credit cards, child support. Whatever remains is what you have left for a mortgage payment. That payment covers principal, interest, property taxes, homeowners insurance, and mortgage insurance if your down payment is less than 20%. The lower your monthly payment target, the lower the home price you can afford.

A rough rule: a $1,500 monthly payment typically supports a home price around $300,000 to $350,000, depending on your down payment, interest rate, and local property taxes. A $2,000 payment supports roughly $400,000 to $475,000. These are approximations—your actual number depends on what you put down and what rates you lock in.

Key Takeaways

  • Start with a monthly payment you can afford without strain, then work forward to find the home price that payment supports.
  • Your total monthly debt payments should stay below 43% of your gross income; subtract existing debts to find what remains for a mortgage.
  • A $1,500 monthly payment typically supports a home price between $300,000 and $350,000; a $2,000 payment supports roughly $400,000 to $475,000, though rates and taxes shift these numbers.
  • Down payment size, interest rate, and property taxes all change the home price your payment can buy, so get a preapproval letter from a lender to see your actual range.

How down payment size changes the price you can afford

The larger your down payment, the lower your monthly payment for the same home price—or the higher the home price your payment can support. A 20% down payment eliminates mortgage insurance and lowers your interest rate slightly. A 10% down payment means you pay mortgage insurance on top of principal and interest, raising your monthly cost. A 3% down payment raises it further.

On a $350,000 home at 7% interest over 30 years: a 20% down payment ($70,000) costs roughly $1,840 per month in principal and interest alone. A 10% down payment ($35,000) costs roughly $2,100 per month because mortgage insurance is added. A 3% down payment ($10,500) costs roughly $2,280 per month. The same home, same rate, same term—but your payment changes by $440 depending on how much you put down.

If you have $50,000 saved and want to keep your payment at $1,800, a 20% down payment lets you buy a more expensive home than a 10% down payment would. Work with a lender to see how much you can put down and what that does to your monthly cost.

Interest rates shift your affordability more than you might expect

A 1% change in interest rate can add or subtract $200 to $300 from your monthly payment on a $350,000 mortgage. When rates are low, your payment is lower, so you can afford a higher price. When rates are high, your payment is higher, so the same price becomes unaffordable.

At 6% interest, a $350,000 mortgage (20% down, 30-year term) costs about $1,680 per month. At 7% interest, the same mortgage costs about $1,840 per month. At 8% interest, it costs about $2,010 per month. If your target payment is $1,800, you can afford $350,000 at 7% but only $330,000 at 8%.

Interest rates change daily and depend on your credit score, down payment size, loan type, and market conditions. Before you settle on a price range, get a preapproval letter from a lender. They will tell you the rate you may have access to for and show you exactly what your payment would be at that rate.

Property taxes and insurance add hundreds to your monthly cost

Your mortgage payment is not just principal and interest. It also includes property taxes and homeowners insurance, and possibly mortgage insurance and HOA fees. These vary wildly by location and home type.

Property taxes range from under 0.5% of home value per year in states like Hawaii and Alabama to over 2% per year in states like New Jersey and Illinois. On a $350,000 home, that is the difference between $1,750 per year ($146 per month) and $7,000 per year ($583 per month). Homeowners insurance ranges from $800 to $2,000 per year depending on the home, location, and your coverage. In high-risk areas, it can be much higher.

When you get a preapproval, ask the lender to estimate your total monthly payment including taxes and insurance for the price range you are considering. Do not assume principal and interest alone—that number is incomplete and will surprise you at closing.

Use the debt-to-income ratio to find your real ceiling

Lenders use two ratios to decide how much to lend. The front-end ratio is your mortgage payment divided by your gross monthly income. Most lenders want this below 28%. The back-end ratio is all your monthly debt payments (mortgage, car, student loans, credit cards, child support) divided by gross income. Most lenders want this below 43%.

If you earn $6,000 gross per month, the front-end ratio says your mortgage payment should not exceed $1,680 (28% of $6,000). But if you already pay $400 per month on a car loan and $200 on student loans, the back-end ratio says your total debt—including the new mortgage—should not exceed $2,580 (43% of $6,000). That leaves $1,980 for your mortgage payment.

The tighter of the two ratios is your limit. In this example, the front-end ratio is tighter, so $1,680 is your maximum mortgage payment. That payment supports a home price of roughly $300,000 to $330,000, depending on your down payment, interest rate, and local taxes.

What a preapproval letter actually tells you

A preapproval letter from a mortgage lender shows the maximum loan amount you may have access to for, the interest rate you locked in, and the monthly payment for that loan. It is based on your credit score, income, existing debts, and down payment. It is not a promise to lend—it is a conditional offer that expires (usually in 90 days) and assumes your financial situation does not change.

The letter tells you the real number to work with. If the lender preapproves you for a $400,000 loan at 7% interest with a 20% down payment, you can afford a home up to roughly $500,000 (the $400,000 loan plus your $100,000 down payment). But that does not mean you should spend that much. A preapproval is what the bank will lend, not what you should borrow.

Get preapproved before you start house hunting. It takes a few days, requires recent pay stubs and tax returns, and shows sellers you are serious. It also forces you to face the real numbers instead of guessing.

The difference between what you can afford and what you should spend

A lender will approve you for the maximum they are willing to risk. That maximum assumes you have no emergency fund, no retirement savings, and no room for a job loss or medical bill. It is not a recommendation for how much to borrow.

A safer rule: keep your mortgage payment below 25% to 28% of your gross income, and make sure you have 3 to 6 months of expenses in savings before you buy. If you earn $6,000 per month, a $1,500 to $1,680 mortgage payment is sustainable. A $2,000 payment leaves you vulnerable if your income drops or an unexpected cost appears.

You can afford a home at the price the lender approves. You should buy a home at the price that leaves you breathing room.

Frequently Asked Questions

How do I know what interest rate I will actually get?

You do not know until you get a preapproval or rate lock from a lender. Your rate depends on your credit score, down payment size, loan type (fixed or adjustable), loan term (15 or 30 years), and current market rates. Rates change daily. A lender will show you the rate you may have access to for based on your financial profile.

Does my student loan debt count against my affordability?

Yes. Lenders include all monthly debt payments—student loans, car loans, credit cards, child support—when calculating your back-end ratio. If you pay $300 per month on student loans, that $300 reduces the amount you can borrow for a mortgage. Paying down existing debt before you explore for a mortgage increases your borrowing power.

What if I have no down payment saved?

You can still buy with as little as 3% down through conventional loans, FHA loans, or VA loans (if you are military). A smaller down payment means a higher monthly payment because mortgage insurance is added. You can afford a lower home price with 3% down than with 20% down, all else equal. Get preapproved to see what price range is realistic for you.

Can I afford a home if I am self-employed?

Yes, but lenders require more documentation. You will need two years of tax returns, profit-and-loss statements, and sometimes bank statements to prove your income is stable. Self-employed borrowers often may have access to for lower loan amounts than W-2 employees with the same income because lenders treat self-employment income more conservatively.

Should I max out what the lender approves me for?

No. A preapproval shows what the lender will risk, not what you should spend. If you are approved for $500,000, you might be comfortable buying a $400,000 home. The difference gives you a cushion for emergencies, job changes, or market downturns. Borrow what you need, not what you may have access to for.