Start with your debt-to-income ratio

The most direct way to know if you can afford a house is to calculate your debt-to-income ratio — the percentage of your gross monthly income that goes toward debt payments. Most lenders will not lend you money for a mortgage if this ratio exceeds 43 percent. To find yours, add up all your monthly debt payments (car loans, student loans, credit cards, child support) and divide by your gross monthly income before taxes.

For example, if you earn $5,000 per month before taxes and pay $1,500 toward existing debts, your ratio is 30 percent. A lender would typically approve you for a mortgage payment of up to $650 per month (43 percent of $5,000 minus your existing $1,500). If your ratio is already above 43 percent, you cannot afford a house until you pay down other debts first.

This calculation matters because lenders use it as a hard boundary. Even if you feel you could stretch further, most mortgage companies will not lend above this threshold. Some lenders are stricter and cap it at 36 percent, so check with your specific lender about their rules.

Key Takeaways

  • Your debt-to-income ratio must stay below 43 percent for most lenders, which means adding all monthly debt payments and dividing by your gross monthly income.
  • You need a down payment of at least 3 to 20 percent of the home's purchase price, depending on the loan type, plus cash reserves for closing costs and emergencies.
  • Your monthly housing payment (mortgage, taxes, insurance, and HOA fees if applicable) should not exceed 28 percent of your gross monthly income.
  • A stable income history of at least two years and a credit score of 620 or higher are standard requirements, though better scores unlock lower interest rates.
  • Use an online mortgage calculator with your actual numbers to see what monthly payment you can handle, then work backward to find your price range.

Calculate the 28 percent housing expense rule

Even if your overall debt-to-income ratio is acceptable, lenders also check whether your housing costs alone are reasonable. The 28 percent rule says your monthly housing payment should not exceed 28 percent of your gross monthly income. This payment includes your mortgage principal and interest, property taxes, homeowners insurance, and HOA fees if you have them.

If you earn $5,000 per month, your housing payment should not exceed $1,400. That $1,400 covers everything — not just the mortgage itself. Property taxes and insurance can vary widely by location, so you cannot calculate this accurately without knowing the specific house and area. A real estate agent or mortgage lender can give you estimates for taxes and insurance once you have identified a property.

The 28 percent rule is stricter than the 43 percent debt-to-income rule, so it often becomes the limiting factor. If you pass the 43 percent test but fail the 28 percent test, you cannot afford the house at that price point.

Determine how much down payment you actually have

Your down payment is the cash you pay upfront toward the home's purchase price. The rest is borrowed through the mortgage. Down payments range from 3 percent to 20 percent of the purchase price, depending on the loan type. Conventional loans typically require 5 to 20 percent down. FHA loans allow 3.5 percent down. VA loans (for military members and veterans) often allow 0 percent down.

A larger down payment lowers your monthly mortgage payment and may help you avoid paying private mortgage insurance (PMI), which is an extra monthly fee added to your payment if you put down less than 20 percent. For a $300,000 house with 10 percent down, you would need $30,000 in cash. With 20 percent down, you would need $60,000.

Do not drain your savings to make a down payment. You also need cash reserves for closing costs (typically 2 to 5 percent of the purchase price) and an emergency fund for home repairs. If you have $40,000 saved, putting $30,000 down and keeping $10,000 for closing costs and emergencies is more realistic than putting down $35,000 and having almost nothing left.

Check your credit score and payment history

Lenders require a minimum credit score of 620 for a conventional mortgage, though 640 to 660 is more common. FHA loans sometimes accept scores as low as 580. Your credit score affects the interest rate you receive — a score of 760 or higher typically unlocks the best rates, while a score below 620 makes borrowing much more expensive or impossible.

Beyond the score itself, lenders look at your payment history. They want to see that you have paid bills on time for at least two years. Recent late payments, collections, or bankruptcy can disqualify you even if your score is technically high enough. If you have missed payments in the past two years, wait until those fall further back in your history before applying for a mortgage.

You can request a free credit report from each of the three major bureaus (Equifax, Experian, and TransUnion) once per year at annualcreditreport.com. Check all three for errors and dispute anything inaccurate before you apply for a mortgage.

Verify your income is stable and documented

Lenders need proof that your income is real and likely to continue. They typically require two years of tax returns, recent pay stubs, and a letter from your employer confirming your job and salary. If you are self-employed, you may need two years of business tax returns and profit-and-loss statements.

Income that is less than two years old (such as a recent job change) can disqualify you or require a larger down payment. Some lenders will count income from a new job if you work in the same field and the new salary is similar or higher. Bonus income, commission, and overtime are counted only if you have received them consistently for at least two years.

If your income varies (you are freelance, commissioned, or self-employed), lenders average it over two years. A sudden spike in income does not help you borrow more unless you can show it is sustainable. Conversely, a recent dip in income can lower the amount you can borrow.

Use a mortgage calculator with your real numbers

Once you know your debt-to-income ratio, your 28 percent housing limit, your down payment amount, and your credit score, plug those numbers into an online mortgage calculator. Most calculators ask for the loan amount, interest rate, and loan term (usually 15 or 30 years). You can find free calculators on sites like Bankrate, NerdWallet, or your bank's website.

Start by calculating backward: if your 28 percent limit is $1,400 per month, subtract estimated property taxes and insurance for your area to find how much you can spend on the mortgage itself. Then use the calculator to see what loan amount that payment supports. Add your down payment to that loan amount to find your maximum home price.

For example, if your $1,400 monthly housing budget allows $900 for mortgage payment after taxes and insurance, a 30-year mortgage at 7 percent interest supports a loan of roughly $120,000. If you have $30,000 for a down payment, your maximum home price is around $150,000. This is a rough estimate — a lender will give you a precise number once you apply.

Account for ongoing costs beyond the mortgage

The mortgage payment is not your only housing expense. Property taxes vary by location and can range from less than 1 percent to over 2 percent of the home's value annually. Homeowners insurance typically costs $1,000 to $2,000 per year, depending on the home and location. If you put down less than 20 percent, you will pay PMI, which can add $100 to $300 per month to your payment.

Older homes often need repairs. A roof replacement can cost $5,000 to $15,000. A water heater replacement costs $1,000 to $3,000. Many financial advisors suggest setting aside 1 percent of your home's purchase price each year for maintenance and repairs. For a $200,000 home, that is $2,000 per year or about $167 per month.

If the home is in a planned community, you may also pay HOA fees, which can range from $100 to $500 or more per month. These fees are included in your 28 percent housing expense calculation, but many buyers underestimate them or forget about them entirely.

Frequently Asked Questions

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

You cannot borrow for a mortgage until you lower it. Pay down credit cards, car loans, or other debts until your ratio falls below 43 percent. Even paying off one debt can make a difference. Once your ratio improves, you can reapply.

Can I afford a house if I have student loans?

Yes, but student loans count toward your debt-to-income ratio. If you have $300 in monthly student loan payments and earn $5,000 per month, that is 6 percent of your income already committed. You have 37 percent left for a mortgage and other debts. Income-driven repayment plans can lower your monthly payment, which improves your ratio.

Does a larger down payment mean I can afford a more expensive house?

A larger down payment lowers your monthly mortgage payment, which can help you stay within the 28 percent rule. However, it does not change your debt-to-income ratio or your overall borrowing limit. You still cannot borrow more than your income supports, regardless of how much you put down.

What interest rate should I assume when calculating affordability?

Interest rates change daily. Use the current rate for your area as a starting point, but ask your lender what rate you might may have access to for based on your credit score. A rate that is 1 percent higher or lower significantly changes your monthly payment and your maximum home price.

Should I get pre-approved before house hunting?

Yes. Pre-approval tells you the actual amount a lender will lend you based on your income, debts, and credit. It is more accurate than a calculator estimate and shows sellers you are a serious buyer. Pre-approval does not obligate you to borrow — it simply confirms what you can borrow.