How to Figure Out If You Can Afford a Home
A step-by-step guide to applying the 28% and 36% rules, calculating your down payment, and getting pre-approved before you start shopping.
Start With Your Gross Monthly Income
Home affordability calculations start with gross income, meaning your income before any taxes or deductions are taken out. If you earn $65,000 per year as a salaried employee, your gross monthly income is $65,000 divided by 12, which equals approximately $5,417 per month.
If you have variable income from commissions, freelance work, or seasonal employment, calculate an average over the past two years. Lenders will do the same, so using the two-year average ensures your analysis reflects what a lender will actually see.
If you are buying with a partner or spouse, add your incomes together. Lenders qualify joint applicants on combined income, which can substantially increase your buying power. However, both applicants' debt loads also get combined, so outstanding student loans, car payments, and other debts on both sides enter the calculation.
Apply the 28% Front-End Ratio
Multiply your gross monthly income by 0.28. The result is the maximum recommended monthly housing payment, including principal, interest, property taxes, and homeowners insurance. This is called the front-end or housing ratio.
At a $5,417 gross monthly income, 28% equals $1,517. That is the total PITI payment you should target. To find the home price you can afford at this payment, work backwards through a mortgage calculator. Enter various home prices and down payment amounts until you land on a payment near your $1,517 ceiling.
Note that this is a guideline, not a hard maximum. Lenders will approve mortgages with front-end ratios up to 31% for conventional loans and up to 43% for FHA loans. But the 28% guideline exists for a reason — it leaves room in your budget for other financial goals and unexpected expenses.
Apply the 36% Back-End Ratio
Multiply your gross monthly income by 0.36. This is your total allowable monthly debt, including the proposed housing payment plus all other recurring debt obligations — car loans, student loans, credit card minimum payments, and any other installment loans.
At $5,417 gross monthly income, 36% equals $1,950. If you already pay $400 per month in student loan and car loan payments, your mortgage-related payment (PITI) should not exceed $1,550, keeping total debt at $1,950.
The back-end ratio is often more limiting than the front-end ratio for people who carry significant existing debt. If your back-end limit produces a lower housing payment ceiling than your front-end limit, use the lower number. Both ratios must be satisfied simultaneously for a loan to be considered within guidelines.
Account for the Down Payment and Closing Costs
The home price you can afford from a monthly payment perspective must also be matched by the cash you have available. Calculate your down payment amount and closing costs separately from the monthly payment analysis.
Closing costs typically run 2% to 5% of the purchase price. On a $300,000 home, closing costs could be $6,000 to $15,000. Add that to your required down payment. If you plan to put 10% down on a $300,000 home, that is $30,000. Plus $9,000 in estimated closing costs means you need roughly $39,000 in available cash.
Also set aside a small emergency fund after closing — ideally three to six months of expenses. Buying a home without any remaining cash reserve is risky. Unexpected repairs, job disruptions, or medical expenses in the first months of homeownership can create serious financial stress if you have no cushion.
Get Pre-Approved to Confirm
A pre-approval is an actual lender review of your finances that produces a real borrowing limit and rate estimate. It is different from a pre-qualification, which is just a lender's rough estimate based on self-reported information. Pre-approval requires documentation: tax returns, pay stubs, bank statements, and permission to pull your credit.
Getting pre-approved before you start seriously shopping serves two purposes. It confirms how much you actually qualify for, which may be different from your own calculations. And it strengthens your offer when you find a home you want to buy, because sellers prefer buyers who have documented financing in place.
If the pre-approval amount comes in lower than your calculations suggested, ask the lender why. Sometimes the limiting factor is your credit score, sometimes it is your debt-to-income ratio, and sometimes it is simply the lender's guidelines for your situation. Understanding the constraint points to what you would need to improve to increase your buying power.