The question everyone asks before buying their first home is deceptively simple: how much can I afford? The answer depends on your income, existing debts, down payment, interest rate, property taxes, and insurance. Lenders use specific ratios to determine your maximum loan amount, and understanding these ratios before you start shopping prevents the disappointment of falling in love with a house you cannot finance.
The 28/36 Rule
The most widely used guideline in mortgage lending is the 28/36 rule:
- 28% — your total housing costs (mortgage payment, property taxes, homeowner’s insurance, and HOA fees) should not exceed 28% of your gross monthly income.
- 36% — your total debt payments (housing costs plus car loans, student loans, credit cards, and other debts) should not exceed 36% of your gross monthly income.
Max Home Price ≈ Annual Salary × 3 to 4.5 A household earning $100,000/year can typically afford a home between $300,000 and $450,000, depending on debts, down payment, and local tax rates.
Salary-to-Home-Price Examples
| Annual Salary | Max Monthly Housing (28%) | Approx. Home Price | Assumes |
|---|---|---|---|
| $60,000 | $1,400 | $220,000–$260,000 | 6.5% rate, 10% down, $3k taxes |
| $80,000 | $1,867 | $300,000–$350,000 | 6.5% rate, 10% down, $4k taxes |
| $100,000 | $2,333 | $370,000–$440,000 | 6.5% rate, 15% down, $5k taxes |
| $150,000 | $3,500 | $550,000–$660,000 | 6.5% rate, 20% down, $7k taxes |
These are estimates based on the 28% front-end ratio. Your actual affordability depends on your specific debt load, credit score, and the interest rate you qualify for. Model your exact scenario with the Mortgage Calculator.
What Lenders Actually Look At
Beyond the 28/36 rule, lenders evaluate four factors known as the four C’s of credit:
- Credit score — determines your interest rate and whether you qualify at all. Scores above 740 get the best rates; below 620, most conventional lenders will decline.
- Capacity — your DTI ratio and employment stability. Lenders prefer W-2 income with at least two years of history.
- Capital — your down payment and cash reserves. Larger down payments reduce the loan amount and eliminate PMI at 20%+.
- Collateral — the appraised value of the property itself. The home must appraise at or above the purchase price.
Hidden Costs That Reduce Affordability
The mortgage payment is only part of the cost of homeownership. Many first-time buyers underestimate these additional expenses:
- Property taxes — vary enormously by location, from 0.3% of home value in Hawaii to over 2% in New Jersey and Illinois.
- Homeowner’s insurance — typically $1,200–$3,000 per year depending on location and coverage.
- PMI — required with less than 20% down, adding 0.5–1% of the loan amount annually.
- Maintenance — budget 1–2% of the home’s value per year for repairs and upkeep.
- Closing costs — typically 2–5% of the purchase price, due at closing. Use the Down Payment Calculator to model these costs.
Key Takeaways
- Use the 28/36 rule as your starting point: housing costs under 28% of gross income, total debts under 36%.
- Home price ≈ 3–4.5x annual salary is a reasonable range for most buyers.
- Down payment size matters hugely — 20% eliminates PMI and reduces your monthly payment significantly.
- Budget for hidden costs — taxes, insurance, PMI, and maintenance can add 30–50% on top of the base mortgage payment.
- Get pre-approved before shopping so you know your real ceiling, not just estimates.
Frequently Asked Questions
How much house can I afford on a $75,000 salary?
Using the 28% rule, your maximum monthly housing cost would be about $1,750. At a 6.5% interest rate with 10% down, this translates to a home price of roughly $270,000-$320,000 depending on property taxes and insurance in your area.
Can I afford a house if I have student loan debt?
Yes, but student loan payments reduce your borrowing capacity because they count toward your DTI ratio. For example, $400/month in student loan payments on a $75,000 salary moves your available housing budget from about $1,750/month down to $1,350/month, reducing your affordable home price by roughly $60,000-$70,000.
Is it better to put 20% down or a smaller amount?
Putting 20% down eliminates PMI (private mortgage insurance), which saves 0.5-1% of the loan amount annually. However, if saving 20% means waiting years to buy, you may miss out on home appreciation. Many buyers start with 5-10% down and refinance later to drop PMI once they reach 20% equity.