The mortgage you can afford depends on your income, debts, and down payment—not on what a lender will approve you for

A lender will often approve you for more than you should borrow. Banks use a formula: they'll lend you up to 28% of your gross monthly income for housing costs (mortgage, taxes, insurance), or up to 43% of gross income if you include all debts. But that formula doesn't account for your actual expenses, your emergency fund, or how tight your budget will feel.

The mortgage you can truly afford is the one that leaves you with breathing room after you pay it. That usually means borrowing less than what a lender will approve. Start by looking at your take-home pay, your current debts, and your monthly expenses—then work backward to find a number that doesn't squeeze you.

Key Takeaways

  • Lenders typically approve mortgages up to 28% of gross income for housing alone, but this doesn't mean you should borrow that much.
  • Your actual affordability depends on your take-home pay, existing debts, property taxes, insurance, and how much you want left over each month.
  • A down payment of 20% avoids mortgage insurance, but 10% or even 5% down is common—the larger your down payment, the smaller your monthly payment.
  • Use a mortgage calculator to test different loan amounts and see the real monthly cost, including taxes and insurance for the specific area where you're buying.
  • If a lender approves you for a number that makes you uncomfortable, that's a sign to borrow less, not more.

Start with your take-home pay and existing debts

Pull your last two months of pay stubs and add up what actually lands in your account each month—not your gross salary. This is your take-home pay, and it's the only number that matters for what you can afford. If you're self-employed or have variable income, use an average of the last two years.

Next, list every monthly debt payment: car loans, student loans, credit cards, personal loans, anything with a monthly bill. Add them up. Lenders will add your new mortgage payment to this total and check that it doesn't exceed 43% of your gross income. But you should check something different: whether your mortgage payment plus these debts plus your actual living expenses leaves you money to save and handle surprises.

If your take-home is $5,000 a month and you already pay $800 in debts, you have $4,200 left for housing, food, utilities, insurance, childcare, transportation, and everything else. A mortgage payment of $2,000 would leave you $2,200 for all other expenses. That's tight if you have a family. A mortgage of $1,400 would leave $2,800, which is more realistic.

Account for property taxes, insurance, and HOA fees

Your mortgage payment is only part of the cost. 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 can cost $6,000 a year in property taxes alone. Homeowners insurance typically runs $1,000 to $2,000 per year depending on the home and location. If you put down less than 20%, you'll also pay mortgage insurance (PMI), which can add $100 to $300 per month.

Use a mortgage calculator that includes these costs—not just the loan payment. Search "mortgage calculator with taxes and insurance" and enter your state and county. Plug in a home price you're considering, your down payment amount, and your interest rate. The calculator will show you the total monthly payment including property taxes, insurance, and PMI if applicable. This number is what actually comes out of your budget.

If you're in a homeowners association, add that fee too. Some HOAs charge $100 a month; others charge $500 or more. This is a real monthly expense that comes before groceries and utilities.

The down payment changes what you can borrow

A larger down payment means a smaller loan, which means a smaller monthly payment. It also means you avoid mortgage insurance if you put down 20% or more. But it doesn't change the fundamental question: what monthly payment fits your budget?

If you have $60,000 saved and you're looking at a $300,000 home, you can put down 20% ($60,000) and borrow $240,000. Or you can put down 10% ($30,000), borrow $270,000, and pay mortgage insurance. The second option means a higher monthly payment and higher total cost over the life of the loan. But if you need to keep some cash in savings for emergencies, the second option might be the right choice for your situation.

Don't stretch to reach 20% down if it means emptying your savings account. A home emergency—a roof leak, a furnace failure—can cost thousands. You need reserves. If putting down 20% leaves you with less than three months of expenses in savings, put down less and pay the mortgage insurance.

Use the debt-to-income test to find your ceiling

Here's a practical way to find the upper limit of what you should borrow. Take your gross monthly income (the number before taxes) and multiply it by 0.28. That's the maximum housing payment most lenders will approve. But then subtract what you'll actually pay in property taxes, insurance, and HOA fees—because those are part of your housing payment.

Example: Your gross income is $6,000 a month. 28% of that is $1,680. You're looking at a home where property taxes and insurance will total $400 a month, and there's a $150 HOA fee. That leaves $1,680 − $400 − $150 = $1,130 for your actual mortgage payment. Use a mortgage calculator to see what loan amount produces a $1,130 payment at your interest rate.

This gives you a ceiling. But your actual comfort level might be lower. If you have $1,000 in other debts (car payment, student loans), your total debt payments would be $2,130 before you buy groceries. That's 35.5% of gross income—within the 43% lenders allow, but potentially uncomfortable. You might choose to borrow less.

Test your number with a real monthly budget

Once you have a mortgage amount in mind, build a monthly budget that includes it. Write down your take-home pay. Subtract your mortgage payment (including taxes, insurance, and PMI), your existing debts, food, utilities, transportation, childcare, phone, internet, subscriptions, and anything else you actually spend money on. What's left?

If there's $500 or more left over, you have room to save and handle surprises. If there's $100 or less, you're too tight. If you're in the red, the mortgage is too big. This is the test that matters more than any lender's formula.

Many people find that the mortgage a lender approves them for would consume 35% to 40% of their take-home pay. That leaves very little for everything else. A more comfortable target is a mortgage that takes up 25% to 30% of take-home pay, leaving you room to save, handle emergencies, and actually enjoy your life outside of paying the house.

What to do if you can't afford what you want to buy

If the homes you want are priced above what your budget allows, you have three options: save a larger down payment to reduce the loan amount, look in a less expensive area, or wait for your income to increase. There's no shame in any of these. Buying a house you can't afford is far more expensive than waiting.

Some people stretch their budget because they believe home prices will rise and they'll regret waiting. Home prices do rise over time, but they also fall. And even if prices rise, a house you can't afford is a liability, not an asset. You'll spend years stressed about money, unable to save, and one job loss or emergency away from trouble.

If you're currently renting and your rent is lower than the mortgage would be, that's a sign the home is above your comfort zone. Rent is often cheaper than owning the same property because it doesn't include maintenance, repairs, and property taxes. If you can't afford to pay more than you're paying now, the home is too expensive.

Frequently Asked Questions

What if I have a co-borrower—does that change how much I can borrow?

Yes. Lenders add both incomes together and both debt payments together. If you and a partner earn $8,000 gross combined and have $1,200 in combined debts, the lender looks at $8,000 income and $1,200 debts. But you should still run the same budget test: does the mortgage payment plus all other expenses leave you both with money to save and breathe?

Should I borrow the maximum the lender approves?

No. Lenders approve you based on a formula that doesn't know your actual expenses, your risk tolerance, or your goals. They're willing to lend you money that would make your life stressful. Just because you're approved for $450,000 doesn't mean you should borrow it. Borrow what your budget allows, not what the lender permits.

Does my credit score affect how much I can borrow?

Your credit score affects the interest rate you'll be offered, not the loan amount. A higher score gets you a lower rate, which means a lower monthly payment on the same loan. A lower score gets you a higher rate and a higher payment. This is another reason to improve your credit before house hunting if you can—a 1% difference in interest rate saves tens of thousands over 30 years.

What if I want to pay off my mortgage faster—does that change what I can afford?

No. What you can afford is still based on your monthly budget. But if you want to pay it off in 15 years instead of 30, your monthly payment will be much higher on the same loan amount. A 15-year mortgage at the same rate costs roughly 50% more per month than a 30-year mortgage. If you want to pay faster, borrow less so the monthly payment still fits your budget.

Should I get pre-approved before I know what I can afford?

Pre-approval tells you what a lender will lend you, not what you should borrow. It's useful for making an offer on a home because it shows the seller you have financing lined up. But do your budget math first so you know your real ceiling. Then ask the lender to pre-approve you for that amount, not for the maximum they'll allow.