How much house can I afford? A lender's view and a realistic view

The rule lenders actually use: 28/36

Almost every conventional mortgage is underwritten against two ratios. The front-end ratio compares your total housing cost (principal, interest, property taxes, homeowners insurance and any HOA fee — together known as PITI) against your gross monthly income, and most lenders want it at or below 28%. The back-end ratio compares all of your monthly debt payments — housing plus car loans, student loans, minimum credit-card payments — against gross income, and the ceiling is usually 36%.

Gross income is the money before tax, which is why these ratios feel generous. If you earn $6,000 a month before tax, the front-end rule says about $1,680 can go to housing. After tax and a retirement contribution you may only see $4,300, so that payment is 39% of what actually lands in your account. That gap is the single biggest reason people feel house-poor on a loan they were approved for.

The quick sanity check: three times your income

A rough rule that has survived for decades is that the purchase price should be at most about three times your gross annual household income, with a 10-20% down payment. It is crude, but it is useful precisely because it ignores the cleverness of underwriting and lands somewhere conservative.

Two households with the same income can support very different prices. Existing debt is the obvious difference, but so are property taxes, which vary wildly between states and even between neighbouring towns, and mortgage insurance, which is added automatically when the down payment is under 20%.

The costs people forget to include

The monthly payment is the headline, not the whole bill. Closing costs typically run 2-5% of the purchase price and are due on the day you sign. Moving, immediate repairs and furnishing a larger space all land in the first ninety days, when your cash reserves are at their thinnest.

Ongoing, budget separately for maintenance at roughly 1% of the property value per year, and remember that taxes and insurance rise even when your principal and interest do not. A payment that is comfortable today can quietly become tight in four years without you changing anything.

• Principal and interest — the loan repayment itself
• Property taxes — often 0.5-2.5% of value per year in the US
• Homeowners insurance — rising sharply in many regions
• Mortgage insurance — usually added below a 20% down payment
• HOA or condo fees, if the property has them
• Maintenance — budget about 1% of value per year

Down payment: how much is enough

Twenty percent is the traditional target because it removes mortgage insurance and lowers the payment. But waiting years to reach it has its own cost: prices and rates move while you save. Between 5% and 20% is a perfectly normal place to be, as long as you understand the insurance premium that comes with it.

Whatever you put down, keep a separate emergency fund afterwards. Draining every account to reach a rounder down payment leaves you with a house and no cushion, which is exactly when the roof starts leaking.

Turning this into your own number

Start from your gross monthly income, apply the 28% front-end ceiling to get an upper bound, then subtract every existing monthly debt payment and apply the 36% back-end ceiling to get a lower, more honest bound. Where the two disagree, the lower figure is the one to plan around.

Then test the payment against a real month. Take last month's actual bank statement and ask whether the new payment would have fit without touching savings. If the answer is no, the affordable number is smaller than the calculated one — and the calculator is not wrong, your budget is telling you something the formula cannot.