How Much House Can You Afford? A Simple Step-by-Step Guide
Learn the 28/36 rule, see a worked example of how income turns into a home price, and find out what costs to include before you buy.
Buying a home is usually the largest purchase a person makes. Lenders will tell you the maximum they are willing to lend, but that amount is not always comfortable to live with. This guide shows a simple way to estimate a home price that fits your income, using a widely known rule of thumb and a worked example.
Step 1: Know Your Gross Monthly Income
Start with your income before taxes, because lenders usually measure affordability against gross income. If you earn $72,000 per year, your gross monthly income is $6,000. If two people are buying together, you can combine both incomes.
Step 2: Use the 28/36 Rule
Many lenders and planners use two guidelines:
- The 28% rule: your total monthly housing cost should be no more than about 28% of your gross monthly income.
- The 36% rule: all your monthly debt payments, including housing, car loans, student loans, and credit cards, should be no more than about 36%.
These are guidelines, not laws. Some lenders approve higher ratios, and some people are comfortable with less. A lower ratio leaves more room for savings and surprises.
Step 3: Work Out Your Limits
Using the $6,000 monthly income example:
- 28% of $6,000 is $1,680 for housing.
- 36% of $6,000 is $2,160 for all debts.
Suppose you also pay $400 per month on a car loan and a student loan. Then your housing limit under the 36% rule is $2,160 − $400 = $1,760. Because $1,680 is lower than $1,760, the 28% limit is the one that applies, so your target housing cost is about $1,680 per month.
Step 4: Remember What Housing Costs Include
Your housing payment is more than the loan. It usually includes principal and interest, property taxes, homeowners insurance, and sometimes mortgage insurance or association fees. Taxes and insurance vary a lot by location. Suppose they come to about $350 per month in this example. That leaves $1,680 − $350 = $1,330 per month for principal and interest.
Step 5: Turn the Payment Into a Loan Amount
Next, work out how large a loan that payment can support. At an example interest rate of 6.5% on a 30-year loan, a payment of about $1,330 supports a loan of roughly $210,000. If you put 20% down, the home price you could target is about $262,500, with a down payment of about $52,500.
The interest rate in this example is for illustration only and is not today's market rate. You can try your own numbers with our Mortgage Calculator.
How Much the Interest Rate Matters
For a $210,000 loan over 30 years, the monthly principal and interest payment changes a lot with the rate:
- At 5.5%: about $1,192 per month
- At 6.5%: about $1,327 per month
- At 7.5%: about $1,468 per month
A one-point difference in rate changes the payment by roughly $135 to $140 per month in this example. That is why the same income can afford different home prices at different times.
Costs Beyond the Monthly Payment
- Down payment and closing costs: closing costs are often a few percent of the home price.
- Maintenance and repairs: a common planning rule is to set aside about 1% of the home's value each year, though it varies.
- Utilities: larger homes usually cost more to heat, cool, and maintain.
- Moving and furnishing costs: these add up in the first months.
Tips Before You Decide
- Do not stretch to your maximum. Being approved for a loan does not mean it fits your budget comfortably.
- Keep an emergency fund after the purchase. See our guide on the emergency fund.
- Understand your loan type. Compare options in our guide to fixed vs adjustable-rate mortgages.
- Check your credit. A better score can lower your rate. Read how to improve your credit score.
See How the Payment Works
To understand how each payment is divided between principal and interest, read our guide on how mortgage payments work. Then check the numbers against your monthly plan with the budgeting basics guide.
Final Thoughts
A simple way to estimate what you can afford is to start with income, apply the 28/36 guidelines, subtract taxes and insurance, and convert the remaining payment into a loan amount. The result is a starting point, not a promise. This guide is for general education only and is not financial advice. Rates, taxes, insurance, and lending rules vary by location and lender, so speak with a qualified professional before making a major decision.
This guide is for educational purposes only and is not financial, tax, or legal advice.