How much how can you afford

Affordability Calculator

Use Zillow’s affordability calculator to estimate a comfortable mortgage amount based on your current budget. Enter details about your income, down payment and monthly debts to determine how much to spend on a house.

You can afford a house up to
$296,318

Based on the information you provided, a house at this price should fit comfortably within your budget.

Next: See how much you can borrow

You’ve estimated your affordability, now get pre-qualified by a lender to find out just how much you can borrow.

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What will your new home cost? Estimate your monthly mortgage payment with our easy-to-use mortgage calculator.

Use our VA home loan calculator to estimate payments for a VA loan for qualifying veterans, active military, and military families.

Your debt-to-income ratio helps determine if you would qualify for a mortgage. Use our DTI calculator to see if you’re in the right range.

Interested in refinancing your existing mortgage? Use our refinance calculator to see if refinancing makes sense for you.

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Factors that impact affordability

When it comes to calculating affordability, your income, debts and down payment are primary factors. How much house you can afford is also dependent on the interest rate you get, because a lower interest rate could significantly lower your monthly mortgage payment. While your personal savings goals or spending habits can impact your affordability, getting pre-qualified for a home loan can help you determine a sensible housing budget.

How to calculate affordability

Zillow’s affordability calculator allows you to customize your payment details, while also providing helpful suggestions in each field to get you started. You can calculate affordability based on your annual income, monthly debts and down payment, or based on your estimated monthly payments and down payment amount.

Our calculator also includes advanced filters to help you get a more accurate estimate of your house affordability, including specific amounts of property taxes, homeowner’s insurance and HOA dues (if applicable). Learn more about the line items in our calculator to determine your ideal housing budget.

Annual income

This is the total amount of money earned for the year before taxes and other deductions. You can usually find the amount on your W2 form. If you have a co-borrower who will contribute to the mortgage, combine the total of both incomes to get your annual income.

Total monthly debts

Down payment

Debt-to-income ratio (DTI)

The total of your monthly debt payments divided by your gross monthly income, which is shown as a percentage. Your DTI is one way lenders measure your ability to manage monthly payments and repay the money you plan to borrow. Our affordability calculator will suggest a DTI of 36% by default. You can get an estimate of your debt-to-income ratio using our DTI Calculator.

Interest rate

The amount that a lender charges a borrower for taking out a loan. Typically, the interest rate is expressed as an annual percentage of the loan balance. The borrower makes payments (with interest) to the lender over a set period of time until the loan is paid in full. Our affordability calculator uses the current national average mortgage rate. Your interest rate will vary based on factors like credit score and down payment. Calculate your mortgage interest rate.

Loan term

The length by which you agree to pay back the home loan. The most common term for a mortgage is 30 years, or 360 months, but different terms are available depending on the type of home loan that works best for your situation. You can edit your loan term (in months) in the affordability calculator’s advanced options.

Property tax

When owning a home, you pay annual property taxes based on the assessed value of the property or purchase price of the home, which can affect your affordability. The tax rate you pay can vary by state, county and municipality. Our calculator assumes a property tax rate by default, but you can edit this amount in the calculator’s advanced options. To obtain a more accurate total payment amount, get pre-qualified by a lender.

Homeowner’s insurance (HOI)

Private mortgage insurance (PMI)

Many lenders commonly require private mortgage insurance if a borrower contributes less than a 20% down payment on a home purchase. PMI protects the lender against losses that may occur when a borrower defaults on a mortgage loan. Our calculator bases the PMI on the home price and down payment amount. You can choose to include or exclude PMI in the advanced options of the affordability calculator.

Homeowner’s Association (HOA) dues

Some communities, such as condominiums and townhomes, are governed by a homeowner’s association (HOA) that maintains communal areas and enforces rules and regulations for a monthly fee. Any HOA dues you pay each month can affect your affordability. You can edit this number in the affordability calculator advanced options.

How much mortgage can I qualify for?

Lenders have a pre-qualification process that takes your finances (such as income and debt) into account to determine how much they are willing to lend you. Once the lender has completed a preliminary review, they generally provide a pre-qualification letter that states how much mortgage you qualify for. Get pre-qualified by a lender to confirm your affordability.

Most affordable markets for homebuyers

Frequently asked questions about affordability

How much house can I afford?

While you may have heard of using the 28/36 rule to calculate affordability, the correct DTI ratio that lenders will use to assess how much house you can afford is 36/43. This ratio says that your monthly mortgage costs (which includes property taxes and homeowners insurance) should be no more than 36% of your gross monthly income, and your total monthly debt (including your anticipated monthly mortgage payment and other debts such as car or student loan payments) should be no more than 43% of your pre-tax income.

How much house can I afford with an FHA loan?

With a FHA loan, your debt-to-income (DTI) limits are typically based on a 31/43 rule of affordability. This means your monthly payments should be no more than 31% of your pre-tax income, and your monthly debts should be less than 43% of your pre-tax income. However, these limits can be higher under certain circumstances.

FHA loans typically allow for a lower down payment and credit score if certain requirements are met. The lowest down payment is 3.5% for credit scores that are 580 or higher. If your credit score is between 500-579, you may still qualify for an FHA loan with a 10% down payment. Keep in mind that generally, the lower your credit score, the higher your interest rate will be, which may impact how much house you can afford.

FHA loans are restricted to a maximum loan size depending on the location of the property. Additionally, FHA loans require an upfront mortgage insurance premium to be paid as part of closing costs as well as an annual mortgage insurance premium included in your monthly mortgage payment — both of which may impact your affordability.

How much house can I afford with a VA loan?

Veterans and active military may qualify for a VA loan, if certain criteria is met. While VA loans require a single upfront funding fee as part of the closing costs, the loan program offers attractive and flexible loan benefits, such as no private mortgage insurance (PMI) premiums and no down payment requirements. VA loan benefits are what make house affordability possible for those who might otherwise not be able to afford a mortgage.

Use our VA home loan calculator to estimate how expensive of a house you can afford.

How much should I spend on a house?

An affordability calculator is a great first step to determine how much house you can afford, but ultimately you have the final say in what you’re comfortable spending on your next home. When deciding how much to spend on a house, take into consideration your monthly spending habits and personal savings goals. You want to have some cash reserved in your savings account after purchasing a home. Typically, a cash reserve should include three month’s worth of house payments and enough money to cover other monthly debts. Here are some questions you can ask yourself to start planning out your housing budget:

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When you apply for a loan, a lender will scrutinize your financial situation to make sure you qualify. Here’s what they’re looking for.

If you have bad credit and fear you’ll be denied for a mortgage, don’t worry. You may still be able to get a loan with a low credit score.

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How much house can I afford?

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How we calculate how much house you can afford

Our home affordability calculator estimates how much home you can afford by considering where you live, what your annual income is, how much you have saved for a down payment, and what your monthly debts or spending looks like. This estimate will give you a brief overview of what you can afford when considering buying a house.

Go one step further by applying some of the advanced filters for a more precise picture of what you can afford for a future residence by including the costs associated with homeownership. The advanced options include things like monthly homeowners insurance, mortgage interest rate, private mortgage insurance (when applicable), loan type, and the property tax rate. The more variables you enter into the home affordability calculator will result in a closer approximation of how much house you can afford.

How to calculate annual income for your household

In order to determine how much mortgage you can afford to pay each month, start by looking at how much you earn each year before taxes. Consider all your earnings for the year, which could include salary, wages, tips, commission, etc.

If you have a spouse or a partner that has an income which will also contribute to the monthly mortgage, make sure to include that as well into your gross annual income for your household. Then take your annual income and divide by 12 to determine your monthly income.

Follow the 28/36 debt-to-income rule

This rule asserts that you do not want to spend more than 28% of your monthly income on housing-related expenses and not spend more than 36% of your income against all debts, including your new mortgage. Keeping within these parameters will ensure you enough money left over for food, gas, vacations, and saving for retirement.

How much of a down payment do you need for a house?

A 20% down payment is standard, if you can afford it. Though some mortgage loans may only require as little as 3.5 percent down, or none at all, a larger down payment will have a greater impact on your monthly mortgage payment.

Your down payment effectively reduces the total amount of your home loan, which increases your home affordability estimate, and at the same time, decreases your mortgage payment each month. For example, below is a chart showing how a certain level of down payments, based on a percentage of the sale price, directly impacts your monthly mortgage payment (based on a 30-year mortgage at a fixed rate of 4.241% APR):

Use the affordability calculator to see how your down payment affects your home affordability estimate and your monthly mortgage payment.

Create your list of monthly expenses

Lenders calculate how much they will lend you to buy a home based on your monthly income minus any fixed, recurring expenses you’re obligated to pay. Once you have your monthly expenses written down into a list, you can more accurately determine how much money you have left to spend on a monthly mortgage.

You should include expenses such as the following:

Lenders don’t include living expenses as part of this calculation. When adding up your monthly debts, you should not include costs such as:

List out your expenses and then add them together to get your total monthly spending.

What are the different types of home loans?

There are several types of home loans, but which one is right for you will depend entirely on what you qualify for and what ultimately makes the most sense for your financial situation. Below are the five most common home loans you will encounter.

Fixed-Rate Loan

Fixed-rate loans have the same interest rate for the entire duration of the loan. That means your monthly home payment will be the same, even for long-term loans, such as 30-year fixed-rate mortgages. Two benefits to this mortgage loan type are stability and being able to calculate your total interest on your home upfront.

Adjustable-Rate Loan

Adjustable-rate mortgages (ARMs) have interest rates that can change over time. Typically, they start out at a lower interest rate than a fixed-rate loan and hold that rate for a set number of years before changing interest rates from year to year. For example, if you have a 5/1 ARM, you will have the same interest rate for the first 5 years, and then your mortgage interest rate will change from year to year. The main benefit of an adjustable-rate loan is starting off with a lower interest rate to improve affordability.

FHA Loan

USDA Loan

This loan type is specifically designed for families looking to buy homes in rural areas. Similar to the FHA loan, this home loan lets lower-income families become homeowners. The loan does not require a down payment, but you will have to get private mortgage insurance.

VA Loan

This loan is a great option for anyone who is a veteran or currently serving in the United States military. The loan does not require any down payment, and unlike other loans, it also does not require private mortgage insurance.

How loan term and interest rates impact your mortgage

The monthly amount of your mortgage payment depends on loan term (duration) and interest rate. Generally, a longer-term loan will have lower monthly payments, but at a higher interest rate, so you’ll end up paying more money over the life of the loan. You can build up your credit or save for a larger down payment to help qualify for a lower interest rate. A lender can also help determine your mortgage affordability, and present the best loan term and interest rate for your home.

Equally, the lower the interest rate you can get the less you’ll pay each month against your mortgage as well as over the life of the loan. Below are some hypothetical examples of how slight differences in your APR(%) can impact what you pay against your mortgage.

Why do credit scores matter?

Generally, the higher the credit score you have, the lower the interest rate you’ll qualify for and improve overall what you can afford in a home. Even lowering your interest rate by half a percent can save you thousands of dollars and increase your affordability range significantly.

What is the difference between APR vs interest rate?

Mortgage Interest Rate

The mortgage interest rate is the amount charged by a lender in exchange for loaning money to a buyer. It is expressed as a yearly percentage of the total loan amount but is calculated into the monthly mortgage payment.

Annual Percentage Rate (APR)

APR (%) is a number designed to help you evaluate the total cost of a mortgage. In addition to the interest rate, it takes into account the fees, rebates, and other costs you may encounter over the life of the loan. The APR is calculated according to federal requirements and is required by law to be stated in all home mortgage estimates. This allows you to better compare how much mortgage you can afford from different lenders and to see which is the right one for you.

What is property tax?

It’s important to consider taxes when deciding how much house you can afford. When you buy a home, you will typically have to pay some property tax back to the seller, as part of closing costs. Because property tax is calculated on the home’s assessed value, the amount typically can change drastically once a home is sold, depending on how much the value of the home has increased or decreased.

How much is homeowners insurance and what does it cover?

Homeowners insurance is a combination of two types of coverage:

What is Private Mortgage Insurance (PMI)?

Mortgage insurance protects the mortgage lender against loss if a borrower defaults on a loan. Private mortgage insurance (PMI) is required for borrowers of conventional loans with a down payment of less than 20%.

Deciding whether or not PMI is right for you depends on a few different factors. Although PMI raises your monthly payment, it may allow you to purchase a home sooner, which means you can begin earning equity. It’s important to speak to your lender about the terms of your PMI before making a final decision.

What is a jumbo loan?

A jumbo loan is used when the mortgage exceeds the limit for Fannie Mae and Freddie Mac, the government-sponsored enterprises that buy loans from banks. Jumbo loans can be beneficial for buyers looking to finance luxury homes or homes in areas with higher median sale prices. However, interest rates on jumbo loans are much higher because lenders don’t have the assurance that Fannie or Freddie will guarantee the purchase of the loans.

Documents needed for mortgage application

Here are a few documents you should gather to help you understand your financial situation and how much house you can afford. This information will also be required when you apply for a pre-approved home loan.

How much how can you afford

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How much house can I afford?

This DTI is in the affordable range. You’ll have a comfortable cushion to cover things like food, entertainment and vacations.

*DTI is the main way lenders decide how much you can spend on a mortgage.

This is the amount that you pay each month that goes toward paying down the principal of the loan and the cost of borrowing (interest).

The tax that you pay as a property owner, levied by the city, county or municipality.

The standard insurance policy that covers damage to your property and the things you keep in it.

Dues that are used by a homeowners association — a group that manages planned neighborhoods or condo communities. Payments go toward maintenance of common areas used by all homeowners.

The initial portion of the home price that is required at the time of purchase.

Overview of your total upfront closing costs required. Typically you should expect closing costs to be in the range of 2% to 5% of your home’s price.

This is the amount that you pay each month that goes toward paying down the principal of the loan and the cost of borrowing (interest).

The tax that you pay as a property owner, levied by the city, county or municipality.

The standard insurance policy that covers damage to your property and the things you keep in it.

Dues that are used by a homeowners association — a group that manages planned neighborhoods or condo communities. Payments go toward maintenance of common areas used by all homeowners.

The initial portion of the home price that is required at the time of purchase.

Overview of your total upfront closing costs required. Typically you should expect closing costs to be in the range of 2% to 5% of your home’s price.

This DTI is in the affordable range. You’ll have a comfortable cushion to cover things like food, entertainment and vacations.

*DTI is the main way lenders decide how much you can spend on a mortgage.

Credit score is a key factor in determining if you’ll be able to get a mortgage and the rate you qualify for. Higher scores make you eligible for lower interest rates.

Likely rate: 5.422% Edit rate

Down payment & closing costs

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The amount of time you have to pay back the loan. Usually 15 or 30 years for common loans.

Veterans or spouse of veterans can qualify for 0% down payment mortgages.

Income and debts

Annual household income

Your income before taxes. Include your co-borrower’s income if you’re buying a home together.

Minimum monthly debt

This only includes the minimum amount you’re required to pay each month towards things like child care, car loans, credit card debt, student loans and alimony. If you pay more than the minimum, that’s great! But don’t include the extra amount you pay.

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Good for: borrowers who appreciate convenience online and on the go for a fully digital home loan experience with consistently acclaimed customer service.

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Good for: borrowers with solid credit who want to pay low rates and get an online experience with phone support. VA loans are an emphasis.

First-time home buyer guide

First-time home buyer guide

How much mortgage payment can I afford?

While your household income and regular monthly debts may be relatively stable, unexpected expenses and unplanned spending can impact your savings.

A good affordability rule of thumb is to have three months of payments, including your housing payment and other monthly debts, in reserve. This will allow you to cover your mortgage payment in case of some unexpected event.

How does your debt-to-income ratio impact affordability?

An important metric that your bank uses to calculate the amount of money you can borrow is the DTI ratio — comparing your total monthly debts (for example, your mortgage payments including insurance and property tax payments) to your monthly pre-tax income.

How much house can I afford with an FHA loan?

Loans backed by the FHA also have more relaxed qualifying standards — something to consider if you have a lower credit score. If you want to explore an FHA loan further, use our FHA mortgage calculator for more details.

How much house can I afford with a VA loan?

Remember to select ‘Yes’ under ‘Loan details’ in the ‘Are you a veteran?’ box.

To calculate ‘how much house can I afford,’ a good rule of thumb is using the 28%/36% rule, which states that you shouldn’t spend more than 28% of your gross monthly income on home-related costs and 36% on total debts, including your mortgage, credit cards and other loans like auto and student loans.

The 28%/36% rule is a broadly accepted starting point for determining home affordability, but you’ll still want to take your entire financial situation into account when considering how much house you can afford.

What factors help determine ‘how much house can I afford?’

Key factors in calculating affordability are 1) your monthly income; 2) cash reserves to cover your down payment and closing costs; 3) your monthly expenses; 4) your credit profile.

Income – Money that you receive on a regular basis, such as your salary or income from investments. Your income helps establish a baseline for what you can afford to pay every month.

Cash reserves – This is the amount of money you have available to make a down payment and cover closing costs. You can use your savings, investments or other sources.

Debt and expenses – Monthly obligations you may have, such as credit cards, car payments, student loans, groceries, utilities, insurance, etc.

Credit profile – Your credit score and the amount of debt you owe influence a lender’s view of you as a borrower. Those factors will help determine how much money you can borrow and the mortgage interest rate you’ll earn.

For more information about home affordability, read about the total costs to consider when buying a home

How much can I afford to spend on a house?

The home affordability calculator will provide you with an appropriate price range based on your situation. Most importantly, it takes into account all of your monthly obligations to determine if a home is comfortably within financial reach.

NerdWallet’s Home Affordability Calculator helps you easily understand how taking on a mortgage debt will affect your expenses and savings.

How much house can I afford on my salary?

It’s just another way to get comfortable with the home buying power you may already have, or want to gain.

Home affordability begins with your mortgage rate

You will probably notice that any home affordability calculation includes an estimate of the mortgage interest rate you will be charged. Lenders will determine if you qualify for a loan based on four major factors:

Your debt-to-income ratio, as we discussed earlier.

Your history of paying bills on time.

Proof of steady income.

The amount of down payment you’ve saved, along with a financial cushion for closing costs and other expenses you’ll incur when moving into a new home.

If lenders determine you are mortgage-worthy, they will then price your loan. That means determining the interest rate you will be charged. Your credit score largely determines the mortgage rate you’ll get.

Naturally, the lower your interest rate, the lower your monthly payment will be.

Compare mortgage rates

A low rate can save you hundreds each year.

Get your free credit score

See how a mortgage impacts your score.

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How Much House Can You Afford?

How To Calculate Your Ideal Mortgage

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Lindsay VanSomeren is a credit card, banking, and credit expert whose articles provide readers with in-depth research and actionable takeaways that can help consumers make sound decisions about financial products. Her work has appeared on prominent financial sites such as Forbes Advisor and Northwestern Mutual.

If you’re in the market to buy a home, the most significant question to ask yourself is, «How much house can I afford?» This is especially important to consider because a lender might be willing to approve you for more than you can comfortably pay for.

Many factors can affect how affordable it is for you to buy a home. Learn what they are so you can come up with a solid number for how much home you can afford.

Key Takeaways

How Do I Decide How Much House I Can Afford?

Figuring out how much home you can afford isn’t a straightforward answer. You’ll need to look at hard numbers and might need to adjust your home desires for what you can afford.

Lenders will set an absolute cap on how much you might be approved for, but these are often much higher than financial experts recommend. Most advisors recommend a more cautious approach with two basic rules of thumb to guide you. Somewhere between those two rules will be what is right for your situation.

You can do this by taking an in-depth, honest review of your finances. Consider your emotions, too: Are you comfortable buying closer to the max of your budget when that might put you more at risk of default if something were to happen down the road? Or do you prefer to play it safer and stick to the more conservative guidelines? Only you can answer these questions.

How To Estimate a Budget for Your Mortgage

Debt-to-Income Ratio: The 28/36 Rule

Lenders use your debt-to-income ratio (DTI) to set a cap on the maximum price of a home you can buy. They use your DTI to figure out the maximum monthly mortgage payment you can afford and then back-calculate to see how large of a mortgage that works out to.

There are many different types of mortgage programs; each one has its own rules about the maximum DTI you can have and still be approved. In general, many lenders use the 28/36 rule, which limits you to:

Some loan programs allow you to use a DTI as high as 50% for all debts combined instead of 36%. Keep in mind this makes you more likely to be «house poor,» meaning that you may not have much left to spend each month after you’ve satisfied your house payments.

Your Credit Score

Lenders use your DTI to determine the price of the house you can afford. One of the variables that go into that calculation is your interest rate, and your credit score has a significant impact on this.

A higher credit score translates into a lower interest rate. This means you’re not paying as much to your lender, and in turn, you can be approved for a more expensive home. Conversely, a lower credit score translates into a higher interest rate, which can mean a more expensive loan and a smaller approval amount.

Down Payment

Your down payment also affects how much home you can buy. Most lenders offer conventional loans with private mortgage insurance (PMI) for down payments ranging from 5%-15%. However, you may be eligible for an FHA loan with a minimum down payment requirement of 3.5%.

Other Costs To Consider

The ongoing costs of buying a home are more than just your mortgage payments. You’ll also have to budget for:

Most financial experts recommend keeping all of these monthly expenses (mortgage included) within 25% of your income. Note that this is much lower than the amount many lenders might approve.

Frequently Asked Questions (FAQs)

How much mortgage can I qualify for?

Lenders use your debt-to-income ratio to determine how much home you may qualify to buy. Your credit score, down payment savings, mortgage type, and other factors also help determine how much home you can qualify for. Typically, lenders will approve you for far more than what’s «affordable,» so figure out that number on your own and stick with it when shopping for a home.

How does a mortgage work?

When you take out a mortgage, you agree to put a down payment toward the home (20% of the purchase price is an advisable number) in exchange for your lender paying the rest of the sales price to the seller. You then pay back your lender, typically over 30 years. After that time, you will be the sole owner of your home.

How Much Mortgage Can You Afford?

There are a number of factors to consider

Purchasing real estate with a mortgage is often the most extensive personal investment most people make. How much you can afford to borrow depends on several factors, not just what a bank is willing to lend you. You need to evaluate not only your finances but also your preferences and priorities.

Here is everything you need to consider to determine how much you can afford.

Key Takeaways

How Much of a Mortgage Can I Afford?

Ultimately, when deciding on a property, you need to consider several additional factors. First, it’s a good idea to have some understanding of what your lender thinks you can afford (and how it arrived at that estimation). Second, you need to have some personal introspection and figure out what type of home you are willing to live in if you plan on living in the house for a long time and what other types of consumption you are ready to forgo—or not—to live in your home.

While real estate has traditionally been considered a safe long-term investment, recessions and other disasters (like the 2020 economic crisis) can test that theory—and make would-be homeowners think twice.

How Do Lenders Determine Mortgage Loan Amounts?

While each mortgage lender maintains its own criteria for affordability, your ability to purchase a home (and the size and terms of the loan you will be offered) will always depend mainly on the following factors.

Many different factors go into the mortgage lender’s decision on homebuyer affordability, but they boil down to income, debt, assets, and liabilities. A lender wants to know how much income an applicant makes, how many demands there are on that income, and the potential for both in the future—in short, anything that could jeopardize its ability to get paid back. Income, down payment, and monthly expenses are generally base qualifiers for financing, while credit history and score determine the rate of interest on the financing itself.

Gross Income

This is the level of income a prospective homebuyer makes before taking out taxes and other obligations. This is generally deemed your base salary plus any bonus income and can include part-time earnings, self-employment earnings, Social Security benefits, disability, alimony, and child support.

Front-End Ratio

Gross income plays a vital part in determining the front-end ratio, also known as the mortgage-to-income ratio. This ratio is the percentage of your yearly gross income that can be dedicated toward paying your mortgage each month. The total amount of money that makes up your monthly mortgage payment consists of four components, known as PITI: principal, interest, taxes, and insurance (both property insurance and private mortgage insurance, if required by your mortgage).

A good rule of thumb is that the front-end ratio based on PITI should not exceed 28% of your gross income. However, many lenders let borrowers exceed 30%, and some even let borrowers exceed 40%. 

Back-End Ratio

Also known as the debt-to-income ratio (DTI), it calculates the percentage of your gross income required to cover your debts. Debts include credit card payments, child support, and other outstanding loans (auto, student, etc.).

However, a 50% debt-to-income ratio isn’t going to get you that dream home. Most lenders recommend that your DTI not exceed 43% of your gross income. To calculate your maximum monthly debt based on this ratio, multiply your gross income by 0.43 and divide by 12.

Your Credit Score

If one side of the affordability coin is income, then the other side is your debt.

Mortgage lenders have developed a formula to determine the level of risk of a prospective homebuyer. The formula varies but is generally determined by using the applicant’s credit score. Applicants with a low credit score can expect to pay a higher interest rate, also referred to as an annual percentage rate (APR), on their loan. If you want to buy a home soon, pay attention to your credit reports. Be sure to keep a close eye on your reports. If there are inaccurate entries, it will take time to get them removed, and you don’t want to miss out on that dream home because of something that is not your fault.

The 28%/36% Rule

The 28%/36% rule is a heuristic used to calculate the amount of housing debt one should assume. According to this rule, a maximum of 28% of one’s gross monthly income should be spent on housing expenses and no more than 36% on total debt service (including housing and other debt such as car loans and credit cards). Lenders often use this rule to assess whether to extend credit to borrowers. Sometimes the rule is amended to use slightly different amounts, such as 29%/41%.

How to Calculate a Down Payment Amount

The down payment is the amount that the buyer can afford to pay out-of-pocket for the residence, using cash or liquid assets. Lenders typically demand a down payment of at least 20% of a home’s purchase price, but many let buyers purchase a home with significantly smaller percentages. Obviously, the more you can put down, the less financing you’ll need, and the better you look to the bank.

Besides the amount of financing, lenders also want to know the number of years for which the mortgage loan is needed. A short-term mortgage has higher monthly payments but is likely less expensive over the duration of the loan.

Homebuyers need to come up with a 20% down payment to avoid paying private mortgage insurance.

Personal Considerations for Homebuyers

A lender could tell you that you can afford a considerable estate, but can you? Remember, the lender’s criteria look primarily at your gross pay and other debts. The problem with using gross income is simple: You are factoring in as much as 30% of your paycheck—but what about taxes, FICA deductions, and health insurance premiums, In addition, consider your pre-tax retirement contributions and college savings, if you have children. Even if you get a refund on your tax return, that doesn’t help you now—and how much will you get back?

That’s why some financial experts feel it’s more realistic to think in terms of your net income (aka take-home pay) and that you shouldn’t use any more than 25% of your net income on your mortgage payment. Otherwise, while you might be able to pay the mortgage monthly, you could end up “house poor.”

The costs of paying for and maintaining your home could take up such a large percentage of your income—far and above the nominal front-end ratio—that you won’t have enough money left to cover other discretionary expenses or outstanding debts or to save for retirement or even a rainy day. Whether or not to be house poor is mostly a matter of personal choice; getting approved for a mortgage doesn’t mean you can afford the payments.

Pre-Mortgage Considerations

In addition to the lender’s criteria, consider the following issues when contemplating your ability to pay a mortgage:

1. Income

Are you relying on two incomes to pay the bills? Is your job stable? Can you easily find another position that pays the same, or better, wages if you lose your current job? If meeting your monthly budget depends on every dime you earn, even a small reduction can be a disaster.

2. Expenses

The calculation of your back-end ratio will include most of your current debt expenses, but you should consider future costs like college for your kids (if you have them) or your hobbies when you retire.

3. Lifestyle

Are you willing to change your lifestyle to get the house you want? If fewer trips to the mall and a little tightening of the budget don’t bother you, applying a higher back-end ratio might work out fine. If you can’t make any adjustments or already have multiple credit card account balances—you might want to play it safe and take a more conservative approach in your house hunting.

4. Personality

Costs Beyond the Mortgage

While the mortgage is undoubtedly the most considerable financial responsibility of homeownership, there are many additional expenses, some of which don’t go away even after the mortgage is paid off. Smart shoppers would do well to keep the following items in mind:

1. Property Taxes

If you own a home, expect to pay property taxes, and understanding how much you will owe is an important part of a homebuyer’s budget. The city, township, or county establishes your property tax based on your home and lot size and other criteria, including local real estate conditions and the market.

According to the Tax Foundation, the effective average rate nationwide for property taxes is 1.1% of the home’s assessed value. This amount varies by state, and some states boast lower property taxes than others. For example, New York’s is an average of 1.4%, but Oklahoma’s is 0.88%. You will always have to account for paying property tax, even when your mortgage is paid off in full.

2. Home Insurance

Every homeowner needs home insurance to protect their property and possessions against natural and human-made disasters, like tornados or theft. If you are purchasing a home, you will need to price out the appropriate insurance for your situation. Most mortgage companies won’t let you purchase a home without home insurance that covers the purchase price of their home. In fact, you may need to show proof of home insurance to be approved by your mortgage lender.

3. Maintenance

Even if you build a new home, it won’t stay new forever, nor will those expensive significant appliances, such as stoves, dishwashers, and refrigerators. The same applies to the home’s roof, furnace, driveway, carpet, and even the paint on the walls. If you are house poor when you take on that first mortgage payment, you could find yourself in a difficult situation if your finances haven’t improved by the time your home requires significant repairs.

4. Utilities

Heat, insurance, electricity, water, sewage, trash removal, cable television, and telephone services cost money. These expenses are not included in the front-end ratio, nor are they calculated in the back-end ratio. Nevertheless, they are unavoidable for most homeowners.

In addition, consider that a bigger house means higher utility bills due to heating and cooling energy needs to condition the bigger space. Many people overlook that when they see a big charming home.

5. Association Fees

Some fees are only used for the administration costs of running the community. It’s important to remember that while an increasing number of lenders include association fees in the front-end ratio, these fees are likely to increase over time.

6. Furniture and Decor

Before you buy a new house, take a good look at the number of rooms that will need to be furnished and the number of windows that will require covering.

Tips for Buying a Home

In order to help ensure that you can afford your home and maintain it over time, there are some smart measures you can take. First, save up a cash reserve in excess of your down payment and keep it in reserve in case you lose your job or are unable to earn income. Having several months of mortgage payments in emergency savings lets you keep the house while looking for new work.

You should also look for ways to save on your mortgage payments. While a 15-year mortgage will cost you less over the loan’s life, a 30-year mortgage will feature lower monthly payments, which may make it easier to afford month-to-month. Certain loan programs also offer reduced or zero down payment options such as VA loans for veterans or USDA loans for rural properties.

Finally, don’t buy a bigger house than you can afford. Do you really need that extra room or finished basement? Does it need to be in this particular neighborhood? If you are willing to compromise a bit on things like this, you can often score lower home prices.

How Much of a Mortgage Can I Afford Based on My Salary?

What Does It Mean to Be House Poor?

How Much Debt Can I Already Have and Still Get a Mortgage?

The amount of debt you can have will depend on your income, and in particular your debt-to-income (DTI) ratio. Generally having a DTI of 30% or less is the rule of thumb going into the mortgage application process, and with the mortgage it shouldn’t then exceed 43% on the back end.

The Bottom Line

The cost of a home is the single largest personal expense most people will ever face. Before taking on such an enormous debt, take the time to do the math. After you run the numbers, consider your situation and think about your lifestyle—not just now but into the next decade or two. Before you purchase your new home, consider not only what it costs you to buy it but how your future mortgage payments will impact your life and budget. Then, get loan estimates for the type of home you hope to buy from several different lenders to get real-world information on the kinds of deals you can get.