How much house can you afford

How much house you can afford isn’t the number a lender will approve you for — it’s the number that leaves your budget alive after closing. Lenders approve you based on gross income and debt ratios; they don’t see childcare, 401k contributions, or the fact that you’d like to eat out occasionally. This guide walks through the 28/36 rule, why maxing your approval is usually a mistake, and how to pressure-test a specific listing against a real take-home budget.

The 28/36 rule

The lending industry’s rule of thumb: housing costs (full PITI — principal, interest, taxes, insurance) should be ≤ 28% of gross monthly income, and total debt (housing + car + student loans + minimums on credit cards) should be ≤ 36% of gross monthly income.

Example: $120,000/year gross = $10,000/month. 28% → $2,800 max PITI. 36% → $3,600 total debt. If you already pay $500 on a car loan and $200 on student loans, your real housing ceiling is $3,600 − $700 = $2,900. Housing ceiling wins over 28% when the back-end ratio is tighter.

Gross vs net — the FIRE-community correction

28% of gross ignores that taxes, insurance premiums, and retirement contributions don’t show up in your checking account. A more conservative version: housing ≤ 25% of net take-home pay. That’s the rule personal-finance writers default to, and it corresponds roughly to 20–22% of gross depending on your tax bracket. Use net if you value cash flow stability over leverage.

From monthly payment to purchase price

Given a target PITI, work backwards. At 6.5% for 30 years, a $2,800 PITI target breaks down like this: back out taxes ($400/mo at 1.2% effective rate on a $400k home = $400) and insurance ($125/mo). Remaining P&I budget: $2,800 − $400 − $125 = $2,275.

$2,275/mo of principal+interest at 6.5% × 30 years supports about $360,000 in mortgage. Add your down payment (say 20% = $90,000) to get a purchase price of $450,000. That’s the house you can afford at a $2,800 PITI target on $120k/year gross.

Why lender pre-approval is higher than this

Lenders often approve at 43% DTI (“qualified mortgage” limit) or higher. On $120k gross, that’s $4,300/mo of total debt — a PITI approaching $3,800 after existing debts. Taking that approval buys you a bigger house and a life with zero financial margin. You’ll be house-rich, cash-poor, and one layoff from panic. The rule of thumb exists because the regression of foreclosure rates against DTI gets ugly past 28/36.

The stress tests to actually run

Before falling in love with a listing, stress-test against three scenarios:

(1) Single-income scenario. If this is a dual-income household, can one income cover PITI for 3 months without draining savings? If no, you’re over-extended.

(2) Rate-reset scenario. If the rate were 1% higher than today’s offer, does the payment still fit? (Relevant for ARMs, less for fixed.)

(3) Maintenance year. Add 1% of home value per year as expected maintenance. On a $450k home, that’s $4,500 ≈ $375/mo you should be saving into a house-repair fund. PITI + $375 should still fit.

The 28% trap in high-cost markets

In San Francisco, Manhattan, Boston, or Seattle, strict 28% is often impossible for first-time buyers — median house price / median income ratios exceed 10 in some markets. If you have to break 28%, at least: (a) have 6+ months of emergency fund liquid, (b) carry no other consumer debt, and (c) plan to stay 5+ years so you don’t eat transaction costs on forced sale.

Down payment, PMI, and the 20% shortcut

20% down avoids PMI (private mortgage insurance, 0.3–1.5% of loan per year). On a $360k mortgage at 0.8% PMI, that’s $2,880/year or $240/mo — dropped entirely at 20% down. Many buyers skip the 20% target to get into a house sooner; that’s fine, but understand PMI adds to your real PITI. Remove it at 20% LTV by refinancing or requesting removal (by law, it auto-drops at 22% LTV).

Closing costs — the budget hit most first-timers miss

Closing costs run 2–5% of purchase price: lender fees, title insurance, escrow setup, attorney (in some states), prepaid interest and taxes. On a $450k house, budget $9k–$22k cash above your down payment. First-time buyer programs sometimes cover some of this; ask your agent.

Run the full affordability pass

Start with the mortgage affordability calculator to get your 28/36 ceiling, then plug the specific listing into the mortgage calculator to see real PITI. Cross-check against your actual spending in the budget calculator — the goal is a PITI that fits inside the life you already have, not one that forces the life you already have to shrink to fit.