How much house can you actually afford?
Lenders will approve you for the maximum amount they think you can technically repay. That number and the amount that actually makes your life comfortable are often very different. Here's how to find your real number.
The bank's calculation vs yours
Lenders typically use the 28/36 rule: your monthly mortgage payment shouldn't exceed 28% of your gross monthly income, and total debt payments (mortgage + car + student loans + credit cards) shouldn't exceed 36%.
The problem: this is based on gross income (before taxes), and it ignores retirement savings, childcare, healthcare costs, and everything else that matters to your actual financial life.
A better formula: the 25% after-tax rule
A more conservative and practical guideline: your total monthly housing payment (principal, interest, taxes, insurance, and HOA if applicable) should not exceed 25% of your monthly take-home pay.
| Take-home pay | 25% rule max payment | Approx home price (7%, 30yr) |
|---|---|---|
| $4,000/month | $1,000/month | ~$145,000 |
| $6,000/month | $1,500/month | ~$215,000 |
| $8,000/month | $2,000/month | ~$290,000 |
| $10,000/month | $2,500/month | ~$360,000 |
Don't forget the hidden costs of homeownership
The mortgage payment is just the beginning. Budget for:
- Property taxes: Typically 1–2% of home value per year ($3,000–$6,000/year on a $300k home)
- Home insurance: $1,000–$2,500/year depending on location and coverage
- Maintenance: Budget 1% of home value per year ($3,000/year on a $300k home) for repairs
- PMI: If your down payment is less than 20%, add 0.5–1.5% of loan value per year
- Utilities: Often higher in a home than an apartment
The down payment equation
A 20% down payment eliminates PMI and reduces your monthly payment significantly. But saving 20% of a $300,000 home ($60,000) can take years. Conventional loans allow as little as 3% down, FHA loans 3.5%. Just factor in the PMI cost and how long it will take to reach 20% equity.
The stress test
Before committing to a home price, live on your projected post-purchase budget for 3 months while continuing to rent. Put the difference between your current rent and projected mortgage payment into savings. If you can do it comfortably, you can afford the house. If it's a struggle, reconsider the price.
Don't ask "what will the bank approve me for?" Ask "what payment lets me still save for retirement, handle emergencies, and actually enjoy my life?" Those are different questions with different answers.