Start with your monthly budget, not the price tag
The amount of house you can afford depends almost entirely on what monthly payment fits into your actual income and expenses—not on what a lender will loan you. A bank may approve you for a $400,000 mortgage, but that does not mean you can comfortably pay it alongside rent, food, insurance, and savings.
The standard rule lenders use is the debt-to-income ratio: your total monthly debt payments (mortgage, car loans, credit cards, student loans) should not exceed 43% of your gross monthly income. For a mortgage alone, many lenders cap it at 28% of gross income. If you earn $5,000 per month before taxes, a 28% mortgage payment would be around $1,400. That is the ceiling lenders use—not necessarily what you should spend.
Your actual affordability is lower. You need money left over for property taxes, homeowners insurance, HOA fees (if applicable), maintenance, utilities, and emergencies. A house that takes 43% of your income leaves almost nothing for these costs or for life outside the mortgage.
Key Takeaways
- Lenders typically allow a mortgage payment up to 28% of your gross monthly income, but your actual comfort level should be lower once you account for taxes, insurance, and maintenance.
- Your total monthly debt payments (including the mortgage) should not exceed 43% of gross income, which is the maximum most lenders will approve.
- A down payment of 20% avoids private mortgage insurance (PMI), which adds $100 to $300+ per month to your payment and is not tax-deductible.
- Property taxes, homeowners insurance, and maintenance typically add 1% to 1.5% of the home's purchase price to your annual costs.
- Your monthly payment changes with interest rates and loan length—a 1% rate increase can add $100+ to a $300,000 mortgage payment.
Calculate backward from your take-home pay
Start with what you actually receive each month after taxes, not your gross salary. If you earn $60,000 per year, your take-home is roughly $3,600 to $4,000 per month depending on state taxes and deductions. From that, subtract what you already spend: car payment, student loans, credit cards, insurance, groceries, utilities, childcare.
What remains is your real mortgage budget. If you have $1,200 left after all other expenses, that is your ceiling—not the $1,400 a lender might approve. This leaves room for the costs lenders do not calculate into the mortgage payment itself: property taxes, homeowners insurance, maintenance, and emergencies.
Use this formula as a reality check: take your target monthly payment and multiply by 200. That is roughly the house price you can afford (assuming a 20% down payment and a 30-year loan at current rates). A $1,200 payment suggests a $240,000 house. A $1,500 payment suggests a $300,000 house. These are approximations—your actual number depends on your interest rate, down payment, and local property taxes.
Understand what gets added to your payment
The mortgage payment itself—principal and interest—is only part of what you pay each month. Lenders bundle other costs into an escrow account, which means your actual monthly bill is higher than the loan payment alone.
Property taxes vary by location but typically run 0.3% to 2% of the home's value per year. In a high-tax state like New Jersey or Illinois, a $300,000 home might cost $6,000 to $9,000 per year in property taxes—$500 to $750 per month. In a low-tax state like Alabama or Louisiana, the same home might cost $1,500 to $2,000 per year. This is not optional and does not build equity.
Homeowners insurance typically costs $800 to $1,500 per year depending on the home's age, location, and coverage level. That is $65 to $125 per month. If you live in a flood zone or hurricane zone, add $500 to $2,000 more per year.
Private mortgage insurance (PMI) is required if your down payment is less than 20%. It costs 0.5% to 1% of the loan amount per year—on a $300,000 loan, that is $1,500 to $3,000 per year, or $125 to $250 per month. PMI is not tax-deductible and does not build equity. It disappears once you reach 20% equity, but that takes years.
HOA fees (if applicable) can range from $100 to $500+ per month and cover common area maintenance, insurance, and amenities. These are mandatory and increase over time.
Factor in maintenance and repairs
Lenders do not require you to budget for maintenance, but homeowners must. A roof lasts 15 to 25 years and costs $8,000 to $15,000 to replace. A water heater lasts 10 to 15 years and costs $1,000 to $2,500. HVAC systems last 15 to 20 years and cost $5,000 to $10,000. Appliances fail. Plumbing backs up. Paint peels.
A common rule: set aside 1% of the home's purchase price per year for maintenance and repairs. On a $300,000 home, that is $3,000 per year, or $250 per month. Some years you spend nothing; other years you spend $5,000 or more. If you cannot afford to set this money aside, you cannot afford the house.
Older homes (built before 1980) often need more: foundation work, electrical updates, plumbing replacement. Newer homes (built after 2000) may need less in the first 10 years but still require regular maintenance. Budget accordingly.
See how interest rates and loan length affect your payment
Two borrowers with the same $300,000 loan will have very different monthly payments depending on the interest rate and how long they borrow.
| Loan Amount | Interest Rate | Loan Term | Monthly Payment (P&I only) |
|---|---|---|---|
| $300,000 | 6.5% | 30 years | ~$1,896 |
| $300,000 | 7.5% | 30 years | ~$2,098 |
| $300,000 | 6.5% | 15 years | ~$2,717 |
| $300,000 | 7.5% | 15 years | ~$2,966 |
A 1% increase in interest rate adds roughly $200 per month to a $300,000 loan. A 15-year loan costs about $800 more per month than a 30-year loan on the same amount. Interest rates change weekly and depend on your credit score, down payment, and loan type. Before you settle on a house price, get a rate quote from a lender so you know your actual payment.
A 30-year loan means lower monthly payments but you pay far more interest over time. A 15-year loan builds equity faster but requires a higher monthly payment. Choose based on what your budget allows, not on what sounds better.
Account for your down payment and closing costs
Your down payment reduces the loan amount and affects your monthly payment, insurance costs, and interest rate. A 20% down payment avoids PMI entirely. A 10% down payment triggers PMI. A 3% down payment (the minimum on many conventional loans) means PMI for years and a higher interest rate.
Closing costs—appraisal, title search, underwriting, attorney fees, inspections—typically run 2% to 5% of the purchase price. On a $300,000 home, that is $6,000 to $15,000 due at closing. Some lenders allow you to roll closing costs into the loan, which increases your monthly payment. Others require you to pay them upfront.
If you have $60,000 saved and are looking at a $300,000 home, that is a 20% down payment with $6,000 to $15,000 left for closing costs. If you have $30,000 saved, you can put down 10% but will need to pay closing costs from that amount, leaving less cushion for emergencies after purchase.
Use a mortgage calculator to test different scenarios
Online mortgage calculators let you enter a loan amount, interest rate, and loan term to see the monthly payment. Enter the payment into your budget to see if it fits. Then adjust the loan amount down and recalculate until the payment feels sustainable.
Most calculators show principal and interest only. Add 25% to 35% to that number to account for property taxes, insurance, PMI (if applicable), and HOA fees. If the calculator shows $1,500 per month, your actual payment is likely $1,875 to $2,025.
Test multiple scenarios: What if the interest rate goes up 1%? What if you put down 10% instead of 20%? What if you choose a 15-year loan instead of 30? Each change shows you how sensitive your budget is to different choices.
Frequently Asked Questions
Can I afford a house if I have student loans or a car payment?
Yes, but your total debt payments (including the mortgage) cannot exceed 43% of gross income. If you earn $5,000 per month and already pay $800 in student loans and a car payment, you have $1,350 left for a mortgage payment ($5,000 × 43% − $800). Paying off high-interest debt before buying reduces your monthly obligations and frees up budget for the house.
What if my income varies month to month?
Lenders typically average your income over the past two years for self-employed borrowers or those with variable income. Use your lowest recent year as your budget number, not your best year. If you earned $40,000 last year and $60,000 this year, budget based on $40,000 to stay safe.
Should I buy as much house as the lender approves?
No. Lenders approve based on debt-to-income ratios, not on your actual comfort or emergency fund. Just because a bank will loan you $400,000 does not mean you should borrow it. A smaller house with a smaller payment leaves room for maintenance, property taxes, and life emergencies.
How much should I have saved before buying?
At minimum, a down payment (3% to 20% depending on loan type) plus closing costs (2% to 5%). Beyond that, save three to six months of total housing costs (mortgage, taxes, insurance, maintenance) as an emergency fund. Unexpected repairs happen in the first year of ownership.
Does a higher salary mean I can afford a more expensive house?
Only if your expenses stay the same. If you earn $100,000 but spend $80,000 per year on other things, you have the same budget as someone earning $60,000 who spends $40,000. Affordability is about what is left after all other bills, not about gross income alone.