The real test: your debt-to-income ratio and down payment

You can afford a house when your monthly debt payments (car loans, credit cards, student loans, everything) plus the new mortgage payment stay below 43% of your gross monthly income, and you have saved a down payment of at least 3% to 5% of the purchase price. Most lenders will not approve you above that 43% threshold, regardless of how much you want the house. This is the hard ceiling, not a guideline.

The second requirement is cash on hand. If you have saved $15,000 and a house costs $300,000, you have the 5% down payment lenders typically want for a conventional loan. If you have only $5,000, you fall short unless you are looking at a lower-priced home or a loan program (like FHA or VA) that accepts 3% down. Down payment is not negotiable with the lender — it is the money you bring to closing.

A third factor, less rigid but still important, is your credit score. Most lenders require a score of at least 620 for an FHA loan and 680 or higher for a conventional loan. If your score is below 620, you will not be approved, and raising it takes months of on-time payments and lower credit card balances.

Key Takeaways

  • Your total monthly debt payments plus the new mortgage must not exceed 43% of your gross monthly income; lenders will not go higher.
  • You need a down payment of at least 3% to 5% of the home price in cash before you can close on a loan.
  • Your credit score must be at least 620 for an FHA loan or 680 for a conventional loan; below that, no lender will approve you.
  • A mortgage pre-approval letter from a lender tells you the actual dollar amount you can borrow, which is more useful than any online calculator.
  • Closing costs (typically 2% to 5% of the loan amount) are separate from your down payment and must also come from your savings.

How to calculate your debt-to-income ratio

Start with your gross monthly income — the number before taxes, not what hits your bank account. If you earn $60,000 a year, your gross monthly income is $5,000. If you are self-employed or have variable income, lenders average your income over the past two years.

Next, list every monthly debt payment: car loan, student loans, credit cards (use the minimum payment, not the balance), personal loans, and any other recurring debt. Do not include utilities, groceries, or insurance. If you have a car payment of $350, student loans of $200, and a credit card minimum of $75, your total monthly debt is $625.

Multiply your gross monthly income by 0.43. In the example above, $5,000 × 0.43 = $2,150. This is the maximum you can spend on all debt combined, including your new mortgage. Subtract your existing debt ($625) and you have $1,525 left for a mortgage payment. A mortgage payment of $1,525 typically means you can borrow around $250,000 to $280,000, depending on interest rates and loan length — but you still need the down payment in cash.

What down payment amount you actually need

Conventional loans (the most common type) usually require 5% to 20% down. FHA loans, backed by the Federal Housing Administration, allow 3.5% down and are easier to get if your credit score is lower or your income is modest. VA loans, for military members and veterans, often require 0% down. USDA loans, for rural properties, also allow 0% down if you meet income limits.

The lower your down payment, the higher your monthly payment and the more interest you pay over the life of the loan. A 3% down payment also triggers private mortgage insurance (PMI), an extra monthly fee that protects the lender if you default. PMI typically costs 0.5% to 1% of the loan amount per year, added to your monthly payment. You can remove PMI once you have paid down the loan to 80% of the home's value, which takes years.

If you have saved $30,000 and are looking at a $300,000 house, you have a 10% down payment. You avoid PMI and your monthly payment is lower than someone putting 3% down on the same house. If you have saved only $10,000, you can still buy the $300,000 house with an FHA loan (3.5% down = $10,500), but you will pay PMI for years.

Closing costs are separate from your down payment

When you close on a house, you pay closing costs — fees for the appraisal, title search, title insurance, attorney, lender origination, and other services. These typically run 2% to 5% of the loan amount. On a $250,000 loan, closing costs can be $5,000 to $12,500. This money comes from your savings, separate from your down payment.

Some sellers will pay part of your closing costs as a negotiating point, but you cannot count on it. If you have saved $20,000 for a $300,000 house, you might use $15,000 for the down payment and $5,000 for closing costs, leaving you with no cushion. Many lenders also require you to have cash reserves after closing — proof that you can cover a few months of mortgage payments if you lose income.

Getting a pre-approval letter from a lender

An online calculator can give you a rough idea, but a pre-approval letter from an actual lender tells you the real number. A lender will pull your credit report, verify your income with recent pay stubs or tax returns, and confirm your down payment savings. They will then issue a letter stating the maximum loan amount you can borrow and the interest rate you may have access to for.

Pre-approval is not the same as final approval — the lender will do another check when you are under contract on a specific house. But pre-approval shows sellers you are a serious buyer and gives you a concrete number to work with when house hunting. The letter is valid for 60 to 90 days, depending on the lender.

To get pre-approved, contact a mortgage lender directly (your bank, a credit union, or a mortgage broker). You will need recent pay stubs, two years of tax returns, bank statements showing your down payment savings, and permission to pull your credit report. The process takes a few days to a week.

When you cannot afford a house yet

If your debt-to-income ratio is above 43%, your options are to pay down existing debt or increase your income. Paying off a car loan or credit card reduces your monthly obligations and frees up room in your debt-to-income calculation. Increasing income (a raise, a second job, or a spouse's income if you are married) raises the ceiling on how much you can borrow.

If you do not have a down payment saved, you have time to build it. Opening a high-yield savings account and setting up automatic transfers each month is the most straightforward path. If you are far from 3% down, focus on that first — it is the hardest part for most buyers. Once you have 3% to 5% saved, you can pursue a loan.

If your credit score is below 620, request a free copy of your credit report from annualcreditreport.com (the only official site, run by the three major credit bureaus). Look for errors and dispute them if you find any. Then focus on paying all bills on time and lowering credit card balances. Credit scores improve slowly, but six to twelve months of good payment history can move you from 580 to 640.

The difference between what you can afford and what you should spend

Lenders will approve you for the maximum 43% debt-to-income ratio, but that does not mean you should borrow that much. A mortgage at the top of your budget leaves no room for job loss, medical emergencies, or home repairs. Most financial advisors suggest keeping your housing payment (mortgage, property tax, insurance, and HOA fees if any) to 28% of gross income, not 43%.

If you earn $5,000 gross per month, a 28% housing payment is $1,400. A 43% total debt payment leaves you $1,525 for a mortgage, but only if you have no other debt. If you have student loans or a car payment, that $1,525 shrinks fast. Borrowing the maximum the lender offers often means house-poor — every dollar goes to the mortgage, and unexpected costs become crises.

A safer approach: save a larger down payment (10% or more), keep your total debt low before you buy, and choose a house price that keeps your housing payment to 28% of income. This leaves breathing room for life.

Frequently Asked Questions

Can I use a gift from family for my down payment?

Yes, but the lender will require a gift letter from the family member stating the money is a gift, not a loan you must repay. The lender will also verify the funds are in your account and have been there for at least two months (to prove they are not borrowed money). Some lenders have stricter rules, so ask before you accept the gift.

What if my income is irregular or I am self-employed?

Lenders average your income over the past two years using tax returns. If you started self-employment recently, you may not may have access to yet. Some lenders use bank deposits instead of tax returns for self-employed borrowers, but the rules vary. A mortgage broker can tell you which lenders work with your income type.

Does my spouse's income count if we are not married?

No. Only income in your name or jointly owned accounts counts. If you are married, your spouse's income counts even if you file taxes separately, though the lender will see both of your debts. If you are unmarried, you can only use your own income, unless your partner is a co-borrower on the loan.

What happens if I get a raise or pay off debt before closing?

Tell your lender immediately. A raise increases your debt-to-income ratio and may allow you to borrow more. Paying off debt also improves your ratio. The lender will re-verify your income and debts before final approval, so they will see the change anyway. Do not hide it.

Can I buy a house with no down payment?

VA loans and USDA loans allow 0% down if you meet the requirements (military service for VA, rural property and income limits for USDA). Conventional loans and FHA loans require a down payment. If you have no savings, a VA or USDA loan may be your only path, but you must still may have access to on income and debt.