How to know if you can afford a mortgage right now

You can afford a mortgage if your monthly payment—including property taxes, homeowners insurance, and mortgage interest—does not exceed 28% of your gross monthly income. That is the standard lenders use. If you earn $5,000 a month before taxes, lenders will typically approve you for a payment around $1,400. The real question is whether that payment leaves you room to live.

Start by calculating what lenders will actually offer you. Pull your credit score (you can get it free from annualcreditreport.com), add up all your existing monthly debt payments (car loans, student loans, credit cards, personal loans), and divide that total by your gross monthly income. If that number is above 43%, most lenders will not approve you, no matter how much you earn. This is called your debt-to-income ratio, and it is the hard ceiling.

Once you know what lenders will approve, the second step is figuring out what you can actually pay without breaking your other budget. A mortgage payment that fits the 28% rule can still leave you house-poor if you have other obligations or if your income is unstable. The lender's math assumes you have money left over for food, utilities, childcare, and emergencies. You need to verify that is true for your situation.

Key Takeaways

  • Lenders will approve you for a mortgage if the payment is 28% of your gross income and your total debt payments are under 43% of gross income, but approval does not mean you can afford it.
  • Your actual affordability depends on your take-home pay after taxes, your other monthly expenses, and whether your income is stable enough to handle a 30-year commitment.
  • A down payment of 20% avoids private mortgage insurance (PMI), which adds $100 to $300 per month to your payment and is not building equity.
  • The true cost of a mortgage includes property taxes, homeowners insurance, and maintenance—often totaling 35% to 50% more than the loan payment alone.
  • If your debt-to-income ratio is above 43%, you will need to pay down existing debt or increase your income before most lenders will approve you.

The difference between what lenders approve and what you can actually afford

Lenders use two ratios to decide whether to approve you. The first is the front-end ratio: your housing payment divided by your gross monthly income. The second is the back-end ratio: all your monthly debt payments (including the new mortgage) divided by gross income. Most lenders cap the front-end at 28% and the back-end at 43%, though some will go higher if you have a large down payment or excellent credit.

These ratios are designed to protect the lender, not you. A lender cares whether you will default on the mortgage. They do not care whether you can pay your electric bill or afford groceries. If you are approved for a $300,000 mortgage at 28% of your income, that means you earn roughly $10,700 a month before taxes. After taxes, you might take home $7,500. Subtract the mortgage payment of $2,000, and you have $5,500 left for everything else—property taxes, insurance, utilities, food, transportation, childcare, medical expenses, and savings. That may be tight depending on where you live and what your other obligations are.

The safest approach is to calculate your own affordability number first, before you talk to a lender. Write down your actual take-home pay (the amount that hits your bank account after taxes and deductions). List every monthly expense you have now: utilities, groceries, transportation, childcare, insurance, debt payments, phone, internet, subscriptions. Add them up. Whatever is left is what you can afford to spend on housing. If that number is less than what lenders will approve you for, use your number, not theirs.

What your actual mortgage payment includes

When you see a mortgage payment quoted, it often shows only the principal and interest—the amount you are borrowing and the cost of borrowing it. The full payment is much larger. It includes four components, often remembered as PITI: principal, interest, taxes, and insurance.

Principal and interest are straightforward: if you borrow $300,000 at 7% over 30 years, your monthly P&I is roughly $2,000. Property taxes vary wildly by location—from under 0.5% of home value per year in some states to over 2% in others. A $300,000 home in a high-tax area might cost $500 a month in property taxes alone. Homeowners insurance typically runs $100 to $200 a month depending on the home and your location. If you put down less than 20%, you also pay private mortgage insurance (PMI), which protects the lender if you default. PMI usually costs 0.5% to 1% of the loan amount per year, divided into monthly payments—often $150 to $300 a month.

Your lender will collect taxes and insurance in escrow, meaning they hold the money and pay those bills on your behalf. Your monthly payment includes all four pieces. A $2,000 principal-and-interest payment can easily become $2,600 or $2,700 once taxes, insurance, and PMI are added. Make sure you are calculating affordability using the full PITI number, not just the loan payment.

How much down payment you need to avoid PMI

Private mortgage insurance protects the lender if you default, but you pay for it. PMI is required if you put down less than 20% of the home price. On a $300,000 home, 20% is $60,000. If you put down $50,000 (16.7%), you will pay PMI until your loan balance drops to 80% of the original home value—which takes years, even as you make payments.

PMI is not building equity. It is an insurance premium the lender charges you. The cost varies by lender, credit score, and loan type, but a typical range is 0.5% to 1% of the loan amount annually. On a $250,000 loan, that is $125 to $250 per month. Over 10 years, you could pay $15,000 to $30,000 in PMI alone, and then it disappears once you hit 80% equity.

If you do not have 20% saved, you have three options: save longer, buy a less expensive home, or accept PMI as part of your payment. There is no shame in PMI if you are buying now rather than waiting years. But factor it into your affordability calculation. If PMI adds $200 to your monthly payment, that is $200 less you have for other expenses or savings.

How to calculate your debt-to-income ratio

Your debt-to-income ratio (DTI) is the total of all your monthly debt payments divided by your gross monthly income. It includes car loans, student loans, credit card minimum payments, personal loans, child support, and the new mortgage payment. It does not include utilities, groceries, rent, or insurance—only debt.

Here is the calculation: Add up every monthly debt payment you currently make. If you have a car loan of $400, student loans of $200, and credit card minimums of $100, that is $700. Add the estimated mortgage payment you are considering—let us say $2,000. Your total monthly debt is $2,700. Divide that by your gross monthly income. If you earn $5,000 a month, your DTI is 54% ($2,700 ÷ $5,000). Most lenders will not approve you at 54%. The limit is usually 43%.

To get approved, you would need to either increase your income to $6,279 a month (so $2,700 is 43% of it) or reduce your debt payments to $2,150 or less. You could do that by paying off the car loan, paying down credit cards, or refinancing student loans to a longer term. The math is simple, but the action takes time. If your DTI is too high, start paying down debt before you apply for a mortgage.

When you should wait before buying

You should wait to buy if your DTI is above 43%, if you do not have an emergency fund, or if your income is unstable. A mortgage is a 30-year commitment. If you lose your job, get sick, or face an unexpected expense, you still owe the payment. Lenders do not care about your circumstances—they will foreclose if you miss payments.

If you are self-employed or your income varies month to month, lenders typically average your income over two years and may require higher down payments or charge higher interest rates. If you are in a probationary period at a new job, some lenders will not approve you until you have been there for two years. If you are planning a major life change—a career switch, a move, a return to school—wait until that transition is complete and your income is stable.

An emergency fund of three to six months of expenses is also important. A mortgage payment is not optional. If your car breaks down, your roof leaks, or you face a medical emergency, you need cash on hand. If you are stretching to afford the down payment and have no savings left, you are one crisis away from missing a payment. Build your emergency fund first, then buy.

How to improve your affordability before applying

If you want to buy but cannot afford what you want, you have three levers: increase your income, decrease your debt, or lower the price of the home you are buying. Increasing income takes time—a raise, a second job, or a career change. Decreasing debt is faster. Paying off a car loan or credit cards reduces your DTI immediately and increases the mortgage payment lenders will approve you for.

Paying off a $400 car loan removes $400 from your monthly debt. If your DTI is 42% and you need to get to 43% to be approved, that one payment might get you there. Even if you are already approved, paying down debt before you buy means a lower DTI, which means lenders will approve you for a larger mortgage or better interest rate.

Lowering the home price is the fastest way to improve affordability. If you are approved for a $350,000 mortgage but can only comfortably afford payments on a $300,000 home, buy the $300,000 home. You can always upgrade later. Buying more house than you can afford is one of the most common reasons people end up house-poor or in foreclosure.

Frequently Asked Questions

What income do lenders count when I apply for a mortgage?

Lenders count your gross income—the amount before taxes and deductions. If you are employed, they use your W-2 or recent pay stubs. If you are self-employed, they average your income over two years using tax returns. If you receive alimony, child support, or Social Security, that counts too, but you usually have to document it. Bonus and commission income may be counted if you have received it for at least two years.

Can I get approved with a DTI above 43%?

Some lenders will approve you with a DTI up to 50% if you have excellent credit, a large down payment, or significant savings. However, most conventional lenders cap at 43%. FHA loans (backed by the Federal Housing Administration) sometimes allow DTI up to 50%, but they require mortgage insurance for the life of the loan. Ask your lender what their maximum is before you apply.

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

No. Only the person whose name is on the mortgage application can use their income to may have access to. If you are married, both spouses can be on the application and both incomes count. If you are unmarried, only the applicant's income counts, even if your partner earns more. You can both be on the title without both being on the mortgage.

What happens to my mortgage payment if interest rates go up after I apply?

If you lock in an interest rate with your lender, your rate is protected for a set period—usually 30 to 60 days. Your monthly payment is based on that locked rate. If rates rise after you lock, your payment does not change. If rates fall, you can ask to re-lock at the lower rate, though some lenders charge a fee. Always lock your rate as soon as you are ready to move forward.

Should I get pre-approved or pre-may have access to before house hunting?

Pre-approval is stronger. Pre-qualification is an estimate based on information you provide; it does not require a credit check. Pre-approval involves a credit check and verification of income and assets, so it shows sellers you are serious and can actually borrow the money. Get pre-approved before you start looking at homes.