Start with your debt and income, not the price tag

Whether you can afford a house depends on three things: how much you earn, how much you already owe, and how much cash you have saved. Banks do not care what a house costs in your neighborhood. They care about your debt-to-income ratio — the percentage of your monthly income that goes to debt payments — and how much you can put down upfront.

Most lenders will not give you a mortgage if your total monthly debt payments (car loans, credit cards, student loans, and the new mortgage payment combined) exceed 43% of your gross monthly income. Some lenders go up to 50%, but that is the ceiling. If you earn $5,000 a month before taxes, your total debt payments should not exceed $2,150. That is the hard limit, regardless of how much you love the house.

The second piece is your down payment. The more you put down, the less you have to borrow, and the easier the lender's decision becomes. A 20% down payment is the standard that avoids mortgage insurance. Anything less than 20% means you pay an extra monthly fee — mortgage insurance — until you have paid down the loan enough to hit that 20% mark.

Key Takeaways

  • Your total monthly debt payments (including the new mortgage) cannot exceed 43% of your gross monthly income, though some lenders allow up to 50%.
  • A 20% down payment avoids the extra cost of mortgage insurance, but down payments as low as 3% to 5% are available through some loan programs.
  • Your credit score affects the interest rate you will pay, which changes your monthly payment by hundreds of dollars over the life of the loan.
  • The price you can afford is not the same as the price the bank will lend you — lenders often approve amounts that stretch your budget too thin.

How lenders calculate the mortgage payment you can handle

Lenders use a formula called the debt-to-income ratio, or DTI. It works like this: add up all your monthly debt payments — your car loan, minimum credit card payments, student loans, and the estimated mortgage payment on the house you want. Divide that total by your gross monthly income (before taxes). If the result is 43% or less, you pass.

The tricky part is the estimated mortgage payment. The lender calculates this using the loan amount, the interest rate they offer you, and the loan term (usually 30 years). A higher interest rate makes the monthly payment larger. A lower interest rate makes it smaller. Your credit score determines which interest rate you get offered. If your score is 620, you might get 7.5%. If your score is 760, you might get 6.2%. That difference of 1.3% adds up to $200 or more per month on a $400,000 loan.

This is why improving your credit score before you shop for a mortgage can save you tens of thousands of dollars over 30 years. Paying down existing debt also helps, because it lowers the numerator in the DTI calculation — you have fewer monthly obligations competing with the mortgage payment.

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

Banks will often lend you more than you should actually spend. A lender might approve you for a $450,000 mortgage because the math technically works at 43% DTI. But that does not mean spending $450,000 is wise for your situation. It means the bank is willing to take the risk.

A useful rule of thumb is to aim for a mortgage payment that is no more than 28% of your gross monthly income. If you earn $5,000 a month, that is $1,400. At current interest rates, that payment covers roughly a $350,000 to $380,000 loan, depending on your down payment and the exact rate. This leaves room in your budget for property taxes, homeowners insurance, maintenance, and life to happen — a car repair, a medical bill, a job change.

The 43% limit is a ceiling, not a target. Aiming for 28% gives you breathing room. Many people who bought at the 43% limit during good times found themselves underwater when interest rates rose, property taxes increased, or income dropped.

How much you need to save for a down payment

Down payment requirements vary by loan type. Conventional loans (the most common type) typically require 5% to 20% down. Federal Housing Administration loans, known as FHA loans, allow down payments as low as 3.5%. Veterans Affairs loans and USDA loans (for rural areas) sometimes require no down payment at all, though you must meet other conditions.

The lower your down payment, the higher your monthly payment becomes, because you are borrowing more. You also pay mortgage insurance — an extra monthly fee that protects the lender if you stop paying. On an FHA loan with 3.5% down, mortgage insurance might add $150 to $300 per month to your payment, depending on the loan size and your credit score.

Beyond the down payment, you need cash for closing costs — the fees the lender, title company, and local government charge to finalize the sale. Closing costs typically run 2% to 5% of the purchase price. On a $350,000 house, that is $7,000 to $17,500. Some sellers will cover part of this in negotiation, but you should plan to pay it yourself.

What your credit score actually changes

Your credit score determines the interest rate you are offered. It does not determine whether you can borrow at all — most lenders will work with scores as low as 580 — but it determines the cost. The difference between a 620 score and a 760 score can be 1.5% to 2% in interest rate. On a $350,000 loan, that is the difference between a $2,331 monthly payment and a $2,066 monthly payment. Over 30 years, that is $95,400.

If your score is below 620, you have fewer options. FHA loans are still available, but the interest rate will be higher. If your score is below 580, conventional and FHA loans become very difficult. Spending three to six months paying down debt and making on-time payments can raise your score 50 to 100 points, which translates directly to a lower interest rate.

Your credit score also affects whether you can borrow at all if you have recent late payments, collections, or a bankruptcy. Most lenders want to see two years since a late payment, three to four years since a collection, and three to seven years since a bankruptcy, depending on the loan type. These are not hard rules — some lenders are more flexible — but they are common.

The monthly costs beyond the mortgage payment

The mortgage payment is only part of homeownership. You also pay property taxes, homeowners insurance, and maintenance. Property taxes vary wildly by location — from under 0.5% of the home value per year in some states to over 2% in others. A $350,000 house in a high-tax area might cost $7,000 per year in property taxes alone. In a low-tax area, it might cost $1,750.

Homeowners insurance covers damage to the house and liability if someone is injured on your property. The cost depends on the house age, location, and the coverage you choose. Expect $1,000 to $2,000 per year for a typical house, more in areas prone to hurricanes or earthquakes.

Maintenance is the cost most first-time buyers underestimate. The general rule is to budget 1% of the home value per year for repairs and upkeep. On a $350,000 house, that is $3,500 per year, or about $290 per month. Some years you spend nothing. Other years the roof needs replacing, or the HVAC system fails, and you spend $10,000. The 1% rule averages it out.

How to test affordability before you talk to a lender

You can do a rough calculation yourself before you spend time with a lender. Write down your gross monthly income — the number before taxes. Multiply it by 0.43. That is the maximum your total monthly debt payments can be. Subtract your current debt payments (car loan, credit cards, student loans). What is left is the maximum mortgage payment the lender will allow.

Next, use an online mortgage calculator and work backward. Enter the maximum payment you just calculated. Enter the interest rate you think you will get (check current rates on a mortgage website — they change daily). Enter 30 years as the term. The calculator will show you the loan amount you can afford. Subtract your down payment savings from that number, and you have a rough price range.

This is not a may provide. A lender will run a full credit check, verify your income, and check your debt history. But it tells you whether you are in the ballpark or whether you need to pay down debt or save more before you are ready.

Frequently Asked Questions

What if I have student loans or a car payment — does that prevent me from getting a mortgage?

No. Existing debt does not disqualify you. It just reduces the mortgage payment the lender will approve. If you owe $400 per month on a car and $200 on student loans, that $600 counts against your 43% limit. The lender will approve a smaller mortgage payment to stay under the ceiling. Paying down these debts before you buy increases the mortgage payment you can afford.

Can I get a mortgage with a credit score below 620?

Yes, but with limitations. FHA loans go down to 580. Below 580, options narrow significantly. Interest rates will be higher, and some lenders will not work with you at all. If your score is low, focus on paying bills on time and paying down balances for three to six months before you apply. A 50-point increase in score can lower your interest rate by 0.5%, saving you thousands over the loan.

What happens if I buy a house and then lose my job?

You are responsible for the mortgage payment regardless. If you cannot pay, the lender can foreclose — take back the house and sell it. This is why lenders want to see that your income is stable and why building an emergency fund (separate from your down payment) matters. Many people recommend having three to six months of expenses saved before you buy.

Is it better to put 20% down or invest the money instead?

That depends on your interest rate and investment returns. If your mortgage rate is 6% and you think you can earn 8% in the stock market, investing might make sense mathematically. But mortgage insurance on a smaller down payment adds cost, and you lose the psychological benefit of lower debt. Most first-time buyers feel more secure with 20% down, even if the math slightly favors investing the extra cash.

How much should I have saved before I start house hunting?

At minimum, your down payment plus closing costs. If you are putting 5% down on a $350,000 house, that is $17,500 down plus $7,000 to $17,500 in closing costs — roughly $25,000 to $35,000. Beyond that, save three to six months of living expenses as an emergency fund. Homeownership brings unexpected costs. Starting with a cushion prevents a single repair from becoming a crisis.