How much house can you afford?

When you start your home search, it’s natural to ask the question, “How much house can I afford?” Depending on who you ask, there are several answers.

Mortgage calculators are based on all different types of formulas. There are mortgage guidelines that may lead you in a different direction. You have to answer based on your comfort, but we’ll give you some things to consider.

The 28/36 rule

As mentioned earlier, the way lenders look at how much you can ultimately afford will depend on which mortgage programs you qualify for. But it doesn’t hurt to start with the general rule for affordability because it gives you some sense of how much of your income should go toward your mortgage.

One commonly used metric is the 28/36 rule. This says that no more than 28% of your monthly income should go toward your mortgage payment. Further, your total debts including your mortgage should comprise no more than 36% of your income.

The first part of the calculation is based on housing expenses, so your mortgage payment is calculated, divided by your income and converted to a percentage, like so:

(Principal + Interest + Property Taxes + Homeowners insurance)

_____________________________________________________________ × 100

Gross monthly income

It should be noted that if you made a down payment of less than 20% or you had an FHA loan, a monthly mortgage insurance payment may be added to the numerator of that formula. The same is true if you have homeowners association dues where you’re looking to buy.

Of course, the other part of the equation is your overall debts. This is referred to as your debt-to-income ratio (DTI) Here’s what that formula looks like:

Installment debt + Revolving debt

_______________________________________ × 100

Gross monthly income

Installment debt is your mortgage payment, but also things like your car payment, student loans and personal loans. Revolving debt is credit cards and anything else where the balance changes every month. When it comes to revolving debt, mortgage lenders calculate it based on your minimum monthly payment.

How much home can you afford on your salary?

To give an idea of how the formula works and how you can apply it to your situation, let’s run through three scenarios with different salary ranges and debt levels.

The point here isn’t to be perfect, so we’ll assume in all instances that you’ve been saving long enough to have two-thirds of your annual salary built up. For the purposes of property taxes and insurance, this is based on buying in a suburb of Detroit. I’ll be using our Home Affordability Calculator for ranges. The credit score is assumed to be 720 or higher.

Taylor makes $60,000 per year and has $1,000 in monthly debt payments. With the 28/36 rule and $40,000 for down payment and closing costs, the monthly payment is $1,074 and they can afford $136,963 as a purchase price. The top end would be 50% DTI and they could in theory afford $209,331. That’s a $1,648 payment and lenders may not approve that DTI.

Parker makes $100,000 and has monthly debts of $1,500. Assuming a $67,000 down payment, Parker can afford $250,291 based on the 28/36 ratio. At a monthly payment of $1,633, if the DTI was bumped up to 50%, the max that could be afforded is $368,732.

Kelly and Jesse are buying a house together with a combined income of $150,000. They have $3,000 in monthly debts and $100,000 for a down payment. Based on the 28/36 rule, they can afford a $1,599 monthly payment and a $277,157 purchase price. On the high side of the budget, they could potentially be approved for up to $505,525 with a $3,065 payment.

Factors that impact how expensive of a house you can buy

There are several factors impacting how much you can afford. Let’s run through some of the major points.

Income

We’ll talk about qualification in more detail in a minute when we talk about DTI, but speaking generally, the more income you have, the higher the mortgage payment you can afford. This has a direct impact on the purchase price you can qualify for. More income means greater financial security.

Debt-to-income ratio

We went over DTI earlier when talking about the 28/36 rule, but generally the lower your existing debt is relative to your income, the higher your mortgage payment can be, which can qualify you for higher loan amounts. The two things you can do to put yourself in better shape if you’re trying to qualify for a mortgage are to either make a higher income or pay off existing debts.

While we’ve talked about the 28/36 rule, odds are lenders will actually qualify you with a 29/41 rule or a 38/45 housing expense to DTI ratio. In fact, when it comes to conforming conventional loans, only your overall DTI plays into qualification in most scenarios.

Down payment

The higher your down payment, the less you have to borrow for your home. A lower loan amount means a lower down payment if the length of the term is the same. So a higher down payment will mean you should be able to afford a bigger home than you would if you had a lower down payment with a higher loan amount.

Beyond that, when a lender doesn’t have to give you as much money, there’s a better chance that the loan is going to be a good one for them, so it has a positive impact on your interest rate.

Credit score

Your credit score is just one of several factors lenders use to determine how good of a risk you are as a borrower. However, it’s really important in terms of how much you can afford because along with your down payment this is among the biggest factors determining your interest rate. The higher it is, the better.

Interest rate

The lower your interest rate is, the lower your monthly payment will be. Therefore, you’ll be able to afford more home at lower interest rates than you could with higher ones. The primary factors that impact your interest rate are your credit score and the size of your down payment.

Occupancy of the property also plays a role. You’ll get a lower rate if it’s your main home than you would if it’s a vacation home or rental property because if you ever run into trouble financially, you’re more likely to make payments on the home you live in first.

Loan repayment term length

If you take a longer-term loan, you should be able to afford more home because the monthly payment would be smaller relative to a loan that gets paid off sooner. The downside here is that you pay more interest on a loan with a longer term than you would on a shorter one.

Reserves

Reserves represent the number of months that you can make your mortgage payment if you were to lose your income. Not every loan requires these to qualify, but it’s a good rule to have at least 2 months of reserves. For jumbo loans, we require 6 – 18 months, depending on the loan amount.

Reserves impact what you can afford based on what you have to be able to show you could draw on in terms of savings. The bigger the house payment, the more you need to have.

Other costs of homeownership

Although we touched on the main things you need to think about, there are several other homeownership costs to budget for:

• Closing costs: Closing costs cover various fees associated with your transaction including origination and processing, title work, escrow account set up, recording fees and more. These tend to be in the range of 3% – 6% of your purchase price.
• Homeowners insurance: Homeowners insurance is required so that the mortgage company has assurance that your property will be repaired or rebuilt in the event of damage. In addition to that basic coverage, you can buy a policy that covers the personal property within your home and provides liability protection in the event that someone injures themselves on your property.
• Property taxes: Property taxes are usually determined based on a percentage of your property value multiplied by your tax rate. They pay for schools and city parks as well as local services like police, fire and garbage collection.
• Home maintenance: The amount you should consider setting aside for this is going to vary depending on the age and condition of the home when you buy it. It’s generally recommended to save 1% – 3% of the purchase price per year for maintenance.

How to make a home more affordable

There are several steps you can take to make the purchase of a home more feasible:

• Improve your credit score. A higher credit score means a lower payment. To accomplish this, make payments on time, keep your credit card utilization at 30% of your limits or lower and don’t apply for any credit you don’t need, particularly during the mortgage process.
• Lower your DTI. By lowering your DTI, you can afford a higher mortgage payment. A higher mortgage payment means the ability to get a more expensive home if you need.
• Save for a larger down payment. While you’re working to buy a home, it may make sense to cut out anything you’re not using and cut back on going out and other forms of entertainment in order to save for a larger down payment so the monthly payment on a bigger home is more affordable. Check out our other tips for saving for a down payment without having to eat buttered noodles for every meal.
• Choose a less expensive home. Just because you may not be able to get your dream home now doesn’t mean you’ll never have it. You can get your starter home now and work your way to your forever home.

Factors that impact how expensive of a house you can buy

There are several factors impacting how much you can afford. Let’s run through some of the major points.

Income

We’ll talk about qualification in more detail in a minute when we talk about DTI, but speaking generally, the more income you have, the higher the mortgage payment you can afford. This has a direct impact on the purchase price you can qualify for. More income means greater financial security.

Debt-to-income ratio

We went over DTI earlier when talking about the 28/36 rule, but generally the lower your existing debt is relative to your income, the higher your mortgage payment can be, which can qualify you for higher loan amounts. The two things you can do to put yourself in better shape if you’re trying to qualify for a mortgage are to either make a higher income or pay off existing debts.

While we’ve talked about the 28/36 rule, odds are lenders will actually qualify you with a 29/41 rule or a 38/45 housing expense to DTI ratio. In fact, when it comes to conforming conventional loans, only your overall DTI plays into qualification in most scenarios.

Down payment

The higher your down payment, the less you have to borrow for your home. A lower loan amount means a lower down payment if the length of the term is the same. So a higher down payment will mean you should be able to afford a bigger home than you would if you had a lower down payment with a higher loan amount.

Beyond that, when a lender doesn’t have to give you as much money, there’s a better chance that the loan is going to be a good one for them, so it has a positive impact on your interest rate.

Credit score

Your credit score is just one of several factors lenders use to determine how good of a risk you are as a borrower. However, it’s really important in terms of how much you can afford because along with your down payment, this is among the biggest factors determining your interest rate. The higher your score, the better.

Interest rate

The lower your interest rate is, the lower your monthly payment will be. Therefore, you’ll be able to afford more home at lower interest rates than you could with higher ones. The primary factors that impact your interest rate are your credit score and the size of your down payment.

Occupancy of the property also plays a role. You’ll get a lower rate if it’s your main home than you would if it’s a vacation home or rental property because if you ever run into trouble financially, you’re more likely to make payments on the home you live in first.

Loan repayment term length

If you take a longer-term loan, you should be able to afford more home because the monthly payment would be smaller relative to a loan that gets paid off sooner. The downside here is that you pay more interest on a loan with a longer term than you would on a shorter one.

Reserves

Reserves represent the number of months that you can make your mortgage payment if you were to lose your income. Not every loan requires these to qualify, but it’s a good rule to have at least 2 months of reserves. For jumbo loans, we require 6 – 18 months, depending on the loan amount.

Reserves impact what you can afford based on what you have to be able to show you could draw on in terms of savings. The bigger the house payment, the more you need to have.

Other costs of homeownership

Although we touched on the main things you need to think about, there are several other homeownership costs to budget for:

• Closing costs: Closing costs cover various fees associated with your transaction including origination and processing, title work, escrow account set up, recording fees and more. These tend to be in the range of 3% – 6% of your purchase price.
• Homeowners insurance: Homeowners insurance is required to protect your lender’s investment and covers repairs or rebuilding after damage. You can also add coverage for personal property and liability protection for injuries on your property.
• Property taxes: Property taxes are usually determined based on a percentage of your property value multiplied by your tax rate. They pay for schools and city parks as well as local services like police, fire and garbage collection.
• Home maintenance: The amount you should consider setting aside for this is going to vary depending on the age and condition of the home when you buy it. It’s generally recommended to save 1% – 3% of the purchase price per year for maintenance.

What does it mean to be house poor?

If a homeowner purchases a house well beyond their means and finds themselves in a situation where they are struggling to pay their bills, they are “house poor.” This is often because homeownership comes with additional unexpected costs, such as property taxes, maintenance expenses, and HOA fees, that can pile up quickly.

While sometimes becoming house poor is unavoidable, there are precautions you can take to minimize the likelihood of it happening.

• Don’t go house-hunting without a plan. Go into house-hunting with a budget and don’t waste time looking at homes you know you can’t afford. Make sure you have a clear and detailed list of your must-haves as well as what you’d like but can do without. Knowing your budget and must-haves beforehand can help you avoid getting carried away.
• Buy a less expensive home. Choose a house on the lower end of your budget, even if you’re tempted to go for the higher end. The 28% rule is a wise one to stick with.
• Do your research. Look into the history of the area’s property taxes and any potential HOA fees to get an idea of how much they might increase.
• Skip the fixer-upper. Find a house in good condition with no major home improvements on the immediate horizon. Continue to keep 1% - 3% of the home cost put aside annually for maintenance so that when you do have a big expense to cover, you’re well-prepared.
• Consider your mortgage options. Choose a longer-term mortgage, like a 30-year fixed-rate mortgage, to lower monthly payments. If you don’t expect to stay in the home for more for 5 years, you can get an adjustable-rate mortgage, which offers lower interest rates during the first 5 years.
• Ensure that you have an emergency fund. Keep aside enough to cover all living expenses for at least 3 months. This way if you have an unavoidable life emergency, you have a cushion to land on.

How to make a home more affordable

There are several steps you can take to make the purchase of a home more feasible:

• Improve your credit score. A higher credit score means a lower payment. To accomplish this, make payments on time, keep your credit card utilization at 30% of your limits or lower and don’t apply for any credit you don’t need, particularly during the mortgage process.
• Lower your DTI. By lowering your DTI, you can afford a higher mortgage payment. A higher mortgage payment means the ability to get a more expensive home if you need it.
• Save for a larger down payment. While saving for a home, consider cutting out unused subscriptions and reducing entertainment costs to afford a larger down payment. There are several ways to save for a down payment without completely changing your lifestyle.
• Choose a less expensive home. Just because you may not be able to get your dream home now doesn’t mean you’ll never have it. You can get your starter home now and work your way to your forever home.

The bottom line: Only buy a house you can truly afford

There are many methods to determining how much house you can afford, but the 28/36 rule is a good guideline in terms of the ratio of housing expenses and overall debt levels to your total income. Particularly for first-time home buyers, saving for a down payment can be just as big a challenge. Take a look at grants that may be available, as well as deferred and forgivable loans.

Your DTI, down payment and interest rate all play a big role in determining the size of your loan amount and how much house you can afford. But it’s just as important to think about closing costs and home maintenance to make sure you can not only afford the house now, but later. Check out our Home Affordability Calculator for budget guidance. If you’re ready, start an application today.

¹ Client will be required to pay a 1% down payment, with the ability to pay a maximum of 3%, and Rocket Mortgage will cover an additional 2% of the client’s purchase price as a down payment, or $2,000. Maximum grant amount is $7,000. Offer valid on primary residence, conventional loan products only. Maximum loan amount of $350,000. Cost of mortgage insurance premium passed through to client effective January 2, 2024. Offer valid only for home buyers when qualifying income is less than or equal to 80% area median income based on county where property is located. Not available with any other discounts or promotions and cannot be retroactively applied to previously closed loans or loans that have a locked rate. This is not a commitment to lend. Rocket Mortgage reserves the right to cancel/modify this offer at any time. Additional restrictions/conditions may apply.