To determine how much house you can afford, lenders and financial experts generally use your income, monthly debts, down payment, and other expenses to calculate affordability. Here are the key points and common rules used:
Key Affordability Guidelines
- Debt-to-Income (DTI) Ratios :
- Most lenders use a DTI ratio of 36/43. This means your monthly mortgage payment (including principal, interest, taxes, and insurance) should be no more than 36% of your gross monthly income. Your total monthly debt payments (including mortgage, car loans, student loans, credit cards, etc.) should not exceed 43% of your gross income
* The traditional 28/36 rule is also widely referenced: no more than 28% of gross income on housing costs and 36% on total debt
* FHA loans often use a stricter 31/43 rule, meaning housing costs should be no more than 31% of income, but total debts still capped at 43%
- Income Example :
If you earn $3,000 a month, under the 36% rule you could afford a mortgage payment up to $1,080 ($3,000 x 0.36). Your total debts should not exceed $1,290 ($3,000 x 0.43)
- Down Payment and Credit Score :
FHA loans allow lower down payments (as low as 3.5% for credit scores 580+), which can affect affordability. Conventional loans usually require higher down payments
How to Calculate Affordability
- Calculate your gross monthly income (before taxes).
- Add up your monthly debts (car loans, student loans, credit cards).
- Estimate your potential monthly housing costs , including mortgage principal and interest, property taxes, homeowners insurance, and possibly HOA fees.
- Use an affordability calculator (like Zillow, NerdWallet, Wells Fargo, or Bankrate) to input your income, debts, down payment, and loan terms to get an estimated affordable home price
Additional Considerations
- Affordability can vary by local housing market and mortgage rates. For example, some U.S. cities have lower shares of income spent on mortgage payments due to lower home prices
- Just because a lender pre-qualifies you for a certain amount doesn’t mean you should spend that much; consider your lifestyle, savings goals, and other expenses to avoid financial stress
- In Germany and other countries, affordability calculations also consider salary, savings, and loan conditions specific to those markets
Summary
You can generally afford a house where your monthly mortgage payment is about 28-36% of your gross monthly income, and your total monthly debts including that mortgage do not exceed 36-43% of your income. Using online affordability calculators with your specific financial details will give the most accurate estimate of how much house you can afford. This approach balances what lenders typically approve with what is financially prudent for you.
