How Much House Can You Actually Afford?
A lender will approve you for more than you should spend. Here is how to find your own number.
Ask a lender how much house you can afford and they will give you a number based on your income, debts, and credit — usually expressed as a maximum monthly payment or a debt-to-income (DTI) ratio. That number is real, in the sense that a bank will actually lend it to you. It is also, for a large share of buyers, higher than what they can comfortably afford once the rest of life is accounted for. Those are two different questions, and conflating them is the single most common mistake in home buying.
The lender's number: DTI ratios
Most conventional lenders use two ratios. The front-end ratio caps your housing payment (principal, interest, taxes, insurance — often abbreviated PITI) at around 28% of gross monthly income. The back-end ratio caps your housing payment plus all other debt payments (car loans, student loans, credit cards) at around 36–43% of gross income, depending on the loan program. FHA and some conventional programs will stretch back-end ratios well past 43% for borrowers with strong credit or compensating factors.
Note what these ratios are calculated against: gross income, before tax. A household earning $120,000/year gross might take home closer to $92,000 after federal and state tax withholding, plus retirement contributions. A 36% back-end ratio on gross income can easily represent 45–50% of what actually lands in your checking account.
The number that actually matters: what's left over
The more useful question is not "what's the biggest payment I can qualify for" but "after this payment, taxes, insurance, and existing debt, what's left for everything else — food, transportation, retirement savings, an emergency fund, and the irregular annual expenses that never show up in a monthly budget (a roof repair, a medical bill, a job gap)?"
A rough, more conservative alternative to the standard DTI approach: target a total housing payment (PITI, plus HOA if applicable) at or below 25% of net (take-home) income, not gross. This tends to land noticeably below what a lender will approve you for, and that gap is the buffer that keeps a rate reset, a job change, or an unexpected repair from becoming a crisis.
Run the numbers before you shop, not after
Use the Loan Payment Calculator to see the actual monthly principal-and-interest cost at different price points and rates — not just the price the lender pre-approved. Then add your real estimates for property tax (check your target area's actual mill rate, not a national average), homeowners insurance (get an actual quote if you can; it varies enormously by region and construction type), and PMI if your down payment is under 20%. Compare that all-in number against your net income, not the lender's approval letter.
A concrete example: a lender approves a household for a $2,800/month payment based on a 43% back-end DTI on $120,000 gross income. Running the math on take-home pay, that same $2,800 payment is closer to 36% of net income once existing debts are subtracted — workable, but tight, with little room for the irregular costs of owning a house (which run higher than renting: maintenance, repairs, and replacements that a landlord would otherwise absorb).
What this changes in practice
Two buyers can be approved for the identical amount and have completely different outcomes three years later, depending on whether they treated the approval number as a target or as a ceiling. Shopping below your maximum approval — even by 10–15% — buys flexibility: room to make extra principal payments if the rate environment changes, room to absorb a temporary income disruption, and room for the house itself to need something expensive in year two.
None of this is a reason to avoid buying, or to assume the lender's number is wrong — it reflects real underwriting standards and default-risk data. It is a reason to run your own numbers against your own take-home pay before you start touring houses, so the number in your head is the one you can actually live with, not the largest one someone was willing to lend you.
Related tools
- Loan Payment Calculator — model the payment at different prices, rates, and down payments
- Savings Goal Calculator — work out how long it takes to reach a target down payment
- Compound Interest Calculator — see what a larger down payment saved for longer is actually worth