Start with your monthly take-home pay, not your salary
The first number you need is what actually lands in your bank account each month after taxes, health insurance, and retirement contributions come out. This is your net income or take-home pay. If you get a regular paycheck, look at your pay stub. If you're self-employed or have irregular income, average what you've actually received over the last three months.
Do not use your gross salary. A $60,000 annual salary does not mean $5,000 a month is available for housing. After taxes and deductions, you might have $3,500 or $3,800 depending on your state, filing status, and what you've chosen to withhold. Start with the real number.
Key Takeaways
- Your take-home pay (what actually hits your bank account) is the only number that matters when figuring out what you can afford.
- Most lenders will not lend you more than 28 percent of your gross monthly income for housing costs, and many borrowers should aim lower.
- Your total monthly debt payments—car loans, student loans, credit cards, everything—cannot exceed 36 to 43 percent of gross income under most lending rules.
- The difference between what a lender says you can borrow and what you can actually afford to pay each month without stress is often $100,000 or more.
- Your down payment, closing costs, and emergency fund all come from the same pool of money, so you need to plan for all three before you borrow.
The 28 percent rule: what lenders will actually lend
Most mortgage lenders use a debt-to-income ratio to decide how much to lend you. The basic rule is that your housing payment cannot exceed 28 percent of your gross monthly income. Gross income is your salary before taxes—the number on your offer letter or tax return, not what you take home.
If your gross monthly income is $4,000, most lenders will not lend you more than enough to make a housing payment of $1,120 per month. That payment includes your mortgage principal and interest, property taxes, homeowners insurance, and mortgage insurance if you put down less than 20 percent. It does not include utilities, maintenance, or HOA fees.
Some lenders will go as high as 31 or 32 percent if you have excellent credit and low other debts. Some will stay at 25 percent if you have recent late payments or high credit card balances. The 28 percent figure is the standard, not a ceiling.
Your total debt matters more than housing alone
Lenders also look at your back-end ratio: all your monthly debt payments divided by your gross income. This includes your new housing payment plus your car loan, student loans, credit cards, personal loans, and any other monthly debt obligation. Most lenders want this number to stay between 36 and 43 percent of gross income.
This is where many borrowers hit a wall. You might may have access to for a $300,000 mortgage based on the 28 percent housing rule, but if you have $800 in car payments, $300 in student loans, and $200 in credit card minimums, your total debt payment is $1,300 before you add the new mortgage. If your gross income is $4,000 a month, that $1,300 is already 32.5 percent of your income—leaving almost no room for a housing payment without exceeding 43 percent.
Before you start house hunting, add up every monthly debt payment you currently make. Subtract that from 43 percent of your gross monthly income. What's left is the maximum housing payment a lender will typically allow. Work backward from there to find the price range you actually may have access to for.
What you can afford is often less than what you can borrow
A lender's decision and your own financial comfort are two different things. A lender might say you can borrow $350,000. That does not mean you should, or that you can afford to without cutting other parts of your life.
When you borrow at the maximum, you have almost no cushion. A job loss, medical emergency, or major home repair becomes a crisis. Many financial advisors suggest aiming for a housing payment that is closer to 20 to 25 percent of your gross income, not 28 percent. This leaves room for emergencies, savings, and the life you actually want to live.
Calculate what your monthly payment would be at different loan amounts using a mortgage calculator. Then ask yourself: if my hours got cut by 10 percent, could I still make this payment? If my furnace died and I needed $5,000 in repairs, would I have to put it on a credit card? If the answer to either question is yes, the price is too high for your situation right now.
Down payment, closing costs, and emergency savings all come from the same money
Many first-time buyers focus only on the down payment and forget that closing costs exist. Closing costs typically run 2 to 5 percent of the purchase price and cover appraisals, inspections, title insurance, attorney fees, and lender fees. On a $300,000 home, that is $6,000 to $15,000 in addition to your down payment.
If you have saved $40,000 and plan to put 10 percent down on a $300,000 home, you need $30,000 for the down payment. That leaves $10,000 for closing costs—which might not be enough. You would also have zero left for emergencies after closing day.
Before you start looking, decide how much you can actually set aside for down payment, closing costs, and a post-closing emergency fund. A reasonable target is down payment plus closing costs plus $3,000 to $5,000 in reserves. If you do not have that total amount saved, you may need to wait, save more, or look at less expensive homes.
Your income stability and job history affect what you can really afford
If you have been in the same job for five years with steady raises, a lender will feel confident about your income. If you just started a new job, changed careers, or are self-employed, lenders view your income as riskier—and you should too.
Self-employed borrowers typically need to show two years of tax returns, and lenders average the income across those years. If you made $80,000 last year but only $50,000 this year, they might average it to $65,000 for qualification purposes. If you are in a commission-based job with variable income, the same averaging applies.
When your income is unstable, you should be even more conservative about what you borrow. A housing payment that works when you earn $5,000 a month becomes impossible if you drop to $4,000. Build a larger emergency fund and aim for a lower payment-to-income ratio.
How to calculate your actual affordability range
Here is the step-by-step process to find a realistic number:
- Write down your gross monthly income (annual salary divided by 12).
- Multiply by 0.28 to find the maximum housing payment a lender will typically allow.
- List every monthly debt payment you currently make (car, student loans, credit cards, personal loans).
- Add your potential housing payment to that total debt.
- Divide the total by your gross monthly income. If it exceeds 0.43, reduce the housing payment until it does not.
- Decide what housing payment you are actually comfortable with—consider aiming for 20 to 25 percent of gross income instead of 28 percent.
- Use a mortgage calculator to find what loan amount that payment supports, accounting for current interest rates and your down payment.
- Subtract your down payment and closing costs from your total savings. Make sure you have at least $3,000 to $5,000 left over.
The number you end up with is your realistic affordability range. It may be lower than what a lender says you can borrow, and that is the right answer for your life.
Frequently Asked Questions
What if I have bad credit or a recent late payment?
Lenders will typically require a lower debt-to-income ratio—sometimes 36 percent instead of 43 percent. You may also face a higher interest rate, which increases your monthly payment. If you have a late payment from the last two years, many lenders will not work with you at all. Waiting six months to a year while you rebuild your credit can lower your interest rate by 0.5 to 1 percent, which saves thousands over the life of the loan.
Does my partner's income count if we are not married?
No. Lenders only count income from people whose names will be on the loan. If you are applying alone, only your income counts. If you are married and both applying, both incomes count. If you are unmarried partners, each person must may have access to separately on their own income, or one person applies and the other is not on the loan.
Can I afford a home if I have student loan debt?
Yes, but your student loan payment reduces how much you can borrow. If you have $300 in monthly student loan payments and your gross income is $4,000, that $300 counts toward your back-end ratio. You have less room left for a housing payment. Paying down student loans before you buy can increase your borrowing power, but it is not required.
What if I get a raise or bonus before I buy?
Lenders typically want to see income for two months before they count it. If you just received a raise, most lenders will not include it in your qualification unless you can show two recent paychecks at the new rate. Bonuses are treated the same way—you need documentation of receiving it for at least two years to count it as regular income.
Should I max out what a lender will give me?
No. Just because a lender says you can borrow $400,000 does not mean you should. Borrowing at the maximum leaves no room for emergencies, job changes, or life events. Most people sleep better at night with a housing payment that is 20 to 25 percent of gross income rather than 28 percent. You can always buy a more expensive home later when your income has grown or your debts have shrunk.