The loan size you can afford depends on your income, existing debts, and how much you can put down

The amount you can borrow is not the same as the amount you should borrow. Lenders will often approve you for more than you can comfortably repay. A debt-to-income ratio — the percentage of your gross monthly income that goes to debt payments — is the most useful number to track. Most lenders cap this at 43 percent, meaning if you earn $5,000 a month before taxes, your total monthly debt payments (mortgage, car loans, credit cards, student loans) should not exceed about $2,150.

Your down payment size, credit score, and loan term all shift what monthly payment you can handle. A larger down payment lowers your monthly cost and may get you a better interest rate. A longer loan term (30 years instead of 15) spreads payments over more months, making each one smaller — but you pay far more interest overall. Your credit score affects the interest rate you are offered; a score 40 points higher can save you thousands over the life of a loan.

Key Takeaways

  • Your debt-to-income ratio should stay at or below 43 percent of your gross monthly income, which includes all debt payments, not just the new mortgage.
  • A down payment of 20 percent or more avoids private mortgage insurance (PMI) and lowers your monthly payment, but 3 to 5 percent down is also common.
  • The interest rate you receive depends heavily on your credit score, so checking your score before shopping for a loan can reveal whether to improve it first or lock in a rate now.
  • A 30-year mortgage has lower monthly payments than a 15-year one, but you pay roughly twice as much interest over the life of the loan.
  • Use an online mortgage calculator to test different down payment amounts, interest rates, and loan terms to see what monthly payment fits your budget.

How to calculate what you can afford using your income

Start with your gross monthly income — the amount you earn before taxes and deductions. Multiply that by 0.43 to find your maximum total monthly debt payment. Subtract what you already pay each month on car loans, student loans, credit cards, and any other debts. The remainder is what you have left for a mortgage payment.

Example: You earn $6,000 a month gross. Your maximum debt payment is $2,580 (43 percent). You pay $350 on a car loan and $200 on student loans. That leaves $2,030 for a mortgage payment. A mortgage calculator will then show you what loan size produces a $2,030 monthly payment at your expected interest rate and loan term.

Some lenders use a stricter front-end ratio of 28 percent, meaning your mortgage payment alone (not including other debts) should not exceed 28 percent of gross income. If you have little other debt, this may be the limiting factor. If you have significant car or student loan payments, the 43 percent back-end ratio usually matters more.

The role of your down payment in loan size

A larger down payment reduces the amount you need to borrow. If a home costs $300,000 and you put down 20 percent ($60,000), you borrow $240,000. If you put down 5 percent ($15,000), you borrow $285,000. The difference in monthly payment is substantial — roughly $360 per month at a 7 percent interest rate on a 30-year loan.

Down payments below 20 percent trigger private mortgage insurance (PMI), an extra monthly fee that protects the lender if you default. PMI typically costs 0.5 to 1 percent of the loan amount per year, added to your monthly payment. This cost disappears once you have paid down the loan to 80 percent of the home's original value, but it can take years. Saving for a 20 percent down payment avoids this cost entirely.

However, waiting years to save 20 percent may not be the right choice if you are paying rent in the meantime or if interest rates are rising. A 5 or 10 percent down payment gets you into a home sooner, and you can refinance later to remove PMI once you have built equity. Run the numbers both ways — the total cost of renting longer versus the cost of PMI — to see which path costs less over your timeline.

How interest rates and credit score affect what you can borrow

Your credit score determines the interest rate you are offered. A score of 760 or higher typically qualifies for the lowest rates. A score between 620 and 679 may cost you 1 to 2 percentage points higher. The difference between a 6 percent and 7 percent rate on a $250,000 loan is roughly $150 per month — or $54,000 over 30 years.

If your credit score is below 620, many conventional lenders will not work with you, though FHA loans (backed by the Federal Housing Administration) may be available at higher rates. Before you shop for a mortgage, pull your credit report from annualcreditreport.com (the only free source required by federal law) and check for errors. Dispute any mistakes; they can lower your score unfairly. If your score is low but accurate, paying down existing debts or waiting a few months while making on-time payments can improve it.

Some lenders offer the option to buy down your interest rate by paying points upfront — typically 1 point costs 1 percent of the loan amount and lowers your rate by 0.25 percent. This makes sense only if you plan to stay in the home long enough to recoup the upfront cost through lower monthly payments.

Loan term length and total cost

A 30-year mortgage has a lower monthly payment than a 15-year one, but the total interest paid is roughly double. On a $250,000 loan at 7 percent, a 30-year term costs about $595 per month in principal and interest, while a 15-year term costs about $1,750. Over the life of the loan, the 30-year version costs roughly $214,000 in interest; the 15-year version costs roughly $65,000.

The choice between them depends on your cash flow and goals. If your monthly budget is tight, a 30-year loan keeps payments manageable. If you have stable income and want to minimize total interest paid, a 15-year loan builds equity faster and costs less overall. Some borrowers split the difference with a 20-year loan. Use a mortgage calculator to see the monthly payment and total interest for each term at your expected rate, then choose based on what fits your budget and timeline.

What happens if you are approved for more than you can afford

Lenders often approve borrowers for loans larger than they can comfortably repay. A lender's approval is based on your income and credit, not on your actual expenses — they do not know if you have medical bills, aging parents to support, or a job that is not as stable as it appears on paper. Just because you are approved for a $400,000 loan does not mean you should take it.

Overextending on a mortgage leaves little room for emergencies, home repairs, property taxes, insurance, and maintenance. A furnace replacement, roof repair, or job loss becomes a crisis. Financial stress from an oversized mortgage can damage your health and relationships. A safer approach is to borrow 10 to 20 percent less than the maximum you are approved for, giving yourself a cushion.

Using a mortgage calculator to test scenarios

An online mortgage calculator lets you input different loan amounts, down payments, interest rates, and terms to see the resulting monthly payment. Start by entering your expected down payment and the home price you are considering. Then adjust the interest rate based on your credit score and current market rates. Finally, compare the 15-year and 30-year monthly payments to see which fits your budget.

Most calculators also show the total amount of interest you will pay over the life of the loan. This number often surprises people — seeing that you will pay $200,000 in interest on a $300,000 loan can motivate you to put down more money upfront or choose a shorter term if possible. Run several scenarios to understand the trade-offs between monthly payment, total cost, and down payment size.

Frequently Asked Questions

What if my debt-to-income ratio is above 43 percent?

You have two options: increase your income or reduce your existing debt. Paying off a car loan or credit card before applying for a mortgage lowers your monthly obligations and frees up room in your ratio. If your income is about to rise (a promotion, a spouse returning to work), some lenders will count future income if you have a written offer letter.

Should I get pre-approved before house hunting?

Yes. Pre-approval shows sellers you are a serious buyer and gives you a clear budget to work within. It also reveals your actual interest rate and monthly payment, not an estimate. Pre-approval is free and does not lock you into a lender — you can shop around and choose a different one when you are ready to close.

Can I borrow more if I have a co-signer?

Yes, a co-signer with strong income and credit can help you may have access to for a larger loan. However, the co-signer is legally responsible for the debt if you default, so lenders count their income and debts in the approval process. This is common when a parent co-signs for a first-time buyer.

What if I want to pay off my mortgage early?

Most mortgages allow you to pay extra toward principal without penalty. If you choose a 30-year loan but pay as if it were a 20-year loan, you will pay it off faster and save on interest. This flexibility is one advantage of a 30-year term — you get the lower monthly payment but can accelerate payoff if your finances improve.

Does the loan amount change if I improve my credit score before closing?

Your interest rate may improve if your score rises significantly between pre-approval and closing, but the loan amount itself is locked in at the time you make an offer on the home. A better rate lowers your monthly payment, but you would still owe the same total amount.