What you can afford depends on your income, debts, and down payment—not just the price the bank will lend you

The mortgage amount a lender will offer you and the amount you can comfortably pay each month are two different numbers. A bank might approve you for $400,000 when you can realistically afford payments on $250,000. The difference is that lenders use a formula based on your income and existing debts, while affordability is about what leaves you with money for groceries, car repairs, and emergencies after the mortgage payment clears.

Your actual affordability depends on four things: your gross annual income, your existing monthly debt payments, how much you have saved for a down payment, and your local property taxes and insurance costs. This section walks through how each one works and how to calculate a number that makes sense for your household.

Key Takeaways

  • Lenders typically allow a mortgage payment up to 28 percent of your gross monthly income, but this does not account for property taxes, insurance, and maintenance costs that come with homeownership.
  • Your total monthly debt payments—car loans, student loans, credit cards, and the new mortgage—should not exceed 36 to 43 percent of gross income, depending on the lender.
  • A down payment of 20 percent avoids mortgage insurance, but you can buy with less if you are willing to pay that extra monthly cost.
  • The actual monthly cost of owning a home includes the mortgage payment plus property taxes, homeowners insurance, and maintenance reserves—often 30 to 50 percent more than the mortgage alone.
  • Your affordability number should leave room for unexpected repairs, job changes, and life events without forcing you to miss payments.

How lenders calculate what they will lend you

Most lenders use two ratios to decide how much to lend. The first is the front-end ratio: your monthly mortgage payment (including property taxes and insurance) should not exceed 28 percent of your gross monthly income. If you earn $5,000 a month gross, lenders will typically allow a housing payment of up to $1,400.

The second is the back-end ratio: your total monthly debt payments—mortgage, car loans, student loans, credit cards, personal loans—should not exceed 36 to 43 percent of gross income. The exact percentage varies by lender and loan type. If you earn $5,000 a month and already pay $400 toward a car loan and $200 toward student loans, you have $600 in existing debt. That leaves room for a mortgage payment of around $1,200 to $1,350 (depending on which ratio the lender uses).

These ratios are the lender's risk calculation, not a measure of what you can actually afford to live on. A lender does not care whether you have $200 left over each month for food and utilities.

Why the lender's number is usually too high

The front-end ratio only counts the mortgage payment itself. It does not include property taxes, homeowners insurance, or mortgage insurance (if your down payment is less than 20 percent). In many states and counties, these costs add 30 to 50 percent to your monthly housing expense.

For example, a $300,000 mortgage at current rates might cost $1,400 a month in principal and interest. But property taxes might add $300, homeowners insurance $150, and mortgage insurance (if applicable) $200. Your actual monthly housing cost is now $2,050—nearly 50 percent more than the mortgage payment alone. If the lender approved you based on a $1,400 payment, you are now over budget.

The back-end ratio also does not account for maintenance and repairs. Homeownership typically costs 1 to 2 percent of the home's value per year in maintenance, repairs, and replacements. A $300,000 home should have $3,000 to $6,000 set aside annually for a new roof, plumbing repairs, HVAC service, or foundation work. That is $250 to $500 a month that the lender's ratio does not count.

Calculating affordability based on your actual expenses

Start with your gross monthly income—the amount before taxes, health insurance, and retirement contributions are taken out. If you earn $60,000 a year, your gross monthly income is $5,000.

Next, list all your monthly debt payments: car loans, student loans, credit card minimums, personal loans, and any other recurring debt. Let's say this total is $600.

Now calculate how much you can spend on housing. A conservative approach is to keep your total debt payments (including the new mortgage) at 36 percent of gross income. At $5,000 gross monthly income, that is $1,800 total. Subtract your existing debt: $1,800 − $600 = $1,200 available for housing.

But $1,200 is not your mortgage payment. It is your total housing budget. You need to subtract property taxes, insurance, and mortgage insurance from this number to find what you can actually spend on the loan itself. In a state with moderate property taxes and insurance costs, this might leave you $700 to $800 for the mortgage payment. A $700 mortgage payment at current rates supports a loan of roughly $140,000 to $160,000, depending on the interest rate and loan term.

This is much lower than what a lender might offer you, but it is the number that leaves you with money for maintenance, emergencies, and the rest of your life.

How your down payment affects what you can afford

The larger your down payment, the smaller the loan you need, and the lower your monthly payment. A 20 percent down payment also eliminates private mortgage insurance (PMI)—an extra monthly cost that protects the lender if you default.

If you are buying a $300,000 home with a 20 percent down payment, you put down $60,000 and borrow $240,000. If you put down 10 percent ($30,000), you borrow $270,000 and pay PMI on top of your regular mortgage payment. PMI typically costs 0.5 to 1 percent of the loan amount per year, or roughly $100 to $225 a month on a $270,000 loan.

This means a smaller down payment makes the monthly payment higher, which reduces how much house you can afford. If you have saved $40,000, you can either put down 20 percent on a $200,000 home (no PMI) or 10 percent on a $400,000 home (with PMI). The second option sounds like you are buying more house, but your monthly payment is higher and your affordability is lower.

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

Even if you calculate that you can afford a $250,000 mortgage, that does not mean you should spend it all. Life changes: job loss, medical bills, a child's education, or a spouse's career shift can happen to anyone. A mortgage payment that takes 28 percent of your income leaves no room for these events.

Many financial advisors recommend keeping your housing payment to 25 percent of gross income or less, which gives you a buffer. At $5,000 gross monthly income, that is $1,250 for all housing costs—mortgage, taxes, insurance, and maintenance combined. This is tighter than what a lender will approve, but it is the number that keeps you safe.

You should also consider whether you are comfortable with the neighborhood and school district at that price point, whether the home needs repairs, and whether you plan to stay in the area for at least five years. A home you can afford financially might not be the right home for your life.

How to estimate property taxes and insurance for a specific home

Property taxes vary dramatically by location. Some states tax homes at 0.3 percent of value per year; others tax at 1.5 percent or higher. You can find your county's tax rate on the county assessor's website, usually under "property tax rates" or "assessment information."

For a specific home, ask the real estate agent or the current owner for the most recent property tax bill. This shows you the actual tax on that address. Do not rely on an estimate—the difference between counties can be thousands of dollars a year.

Homeowners insurance quotes vary by home age, location, and coverage level. You can get estimates from insurance companies online or through an agent. Request quotes for the specific home you are considering, including the dwelling coverage amount (usually the home's replacement cost, not its sale price). Insurance typically costs $800 to $1,500 a year for an average home, but older homes, homes in flood zones, or homes in high-risk areas cost more.

Frequently Asked Questions

What if I have student loans or other debt I cannot pay off before buying?

Student loans and other debt count toward your back-end ratio, which reduces how much mortgage a lender will approve. You can still buy, but your affordable mortgage amount will be lower. Focus on the actual affordability calculation—what leaves you with money after all debt payments—rather than the lender's approval amount.

Does my credit score affect how much I can afford?

Your credit score affects the interest rate you pay, which changes your monthly payment. A higher score gets you a lower rate, which means a lower monthly payment on the same loan amount. This can make a difference of $100 to $300 a month. Improving your credit score before you apply can lower your actual monthly cost, but it does not change your true affordability—only what you can pay without financial stress.

What if my income varies because I work on commission or freelance?

Lenders typically average your income over the past two years for self-employed or commission-based workers. If your income is unpredictable, be more conservative in your affordability calculation. Use your lowest recent year of income, not your average, to account for the possibility of a slower year ahead.

Should I use the lender's approval amount or my own affordability calculation?

Use your own calculation. The lender's job is to minimize their risk; your job is to minimize yours. A lender will approve you for the maximum they think you can pay without defaulting, but that does not mean you should spend it. Your affordability number should account for taxes, insurance, maintenance, and emergencies—things the lender's ratio does not.

How much should I save for a down payment?

Twenty percent eliminates mortgage insurance and is a common target, but you can buy with less. Ten percent down is common; some programs allow 3 to 5 percent. The lower your down payment, the higher your monthly payment and the more you pay in interest over the life of the loan. Save as much as you can without delaying your purchase indefinitely—the difference between 10 and 20 percent down is significant, but the difference between renting for two more years and buying now might matter more to your life.