Buying a home is one of the largest financial decisions most people will ever make. Before you fall in love with a property, it helps to know what price range actually makes sense given your income, savings, and existing debt. This guide walks through the key rules and math behind home affordability.
The 28/36 Rule
Most lenders use the 28/36 rule as a baseline for affordability. Here is what it means:
- 28% rule: Your total monthly housing costs (mortgage principal, interest, property taxes, and insurance) should not exceed 28% of your gross monthly income.
- 36% rule: Your total monthly debt payments — including housing, car loans, student loans, and credit cards — should not exceed 36% of your gross monthly income.
These are guidelines, not hard limits. Some lenders will approve loans at higher ratios, but staying within these numbers gives you a meaningful financial cushion.
Example Calculation
Say you earn $80,000 per year, or about $6,667 per month before taxes.
- 28% of $6,667 = $1,867 per month for housing
- 36% of $6,667 = $2,400 total debt payments
- If you already pay $400/month on a car loan, your max housing payment is $2,000 — still reasonable
At a 7% interest rate on a 30-year loan, a monthly payment of $1,867 supports a loan of roughly $280,000. Add a 20% down payment of $70,000 and your target home price is around $350,000.
Use our Mortgage Payment Calculator to run the numbers with your specific income, rate, and term.
Down Payment: How Much Do You Need?
The traditional benchmark is 20%, which lets you avoid private mortgage insurance (PMI). However, many buyers put down less:
- FHA loans allow as little as 3.5% down for qualified buyers
- Conventional loans can go as low as 3% down with PMI added to your payment
- VA and USDA loans may require 0% down for eligible borrowers
Putting less down means a higher monthly payment and more interest paid over the life of the loan. It also means you carry PMI until you reach 20% equity.
Other Costs to Factor In
The mortgage payment is only part of the picture. Homeownership comes with additional ongoing costs that many first-time buyers underestimate:
- Property taxes: Typically 1–2% of home value per year, though it varies widely by location
- Homeowners insurance: Usually $1,000–$2,500/year depending on your home and area
- HOA fees: If applicable, can range from $50 to $500+ per month
- Maintenance and repairs: A common rule of thumb is 1% of home value per year
- Closing costs: Typically 2–5% of the loan amount, paid upfront
For a $350,000 home, that could mean an additional $500–$800 per month beyond your mortgage payment.
Your Savings and Emergency Fund
Lenders typically want to see at least 2–3 months of mortgage payments in reserves after closing. More importantly, you should feel comfortable that your savings won't be completely depleted by the down payment and closing costs. Entering homeownership without an emergency fund creates real financial risk.
Get Pre-Approved Before Shopping
A mortgage pre-approval gives you a concrete number from a lender based on your actual credit, income, and debt documentation. It is more reliable than any online estimate and is generally required to make a serious offer on a home. Keep in mind that a lender's approval limit and what you can comfortably afford may not be the same number — borrow what fits your budget, not just what you qualify for.
Frequently Asked Questions
What credit score do I need to buy a house?
The minimum credit score varies by loan type. Conventional loans (backed by Fannie Mae/Freddie Mac) typically require a minimum of 620, but you will get the best rates with 740+. FHA loans allow scores as low as 580 with 3.5% down, or even 500 with 10% down. VA loans (for veterans) and USDA loans (for rural properties) have more flexible requirements. A higher credit score not only helps you qualify — it can reduce your interest rate by 0.5–1.5%, saving tens of thousands over the life of the loan.
How much should I save for a down payment?
The conventional wisdom is 20% down to avoid Private Mortgage Insurance (PMI). However, many buyers purchase with less: FHA loans require 3.5%, conventional loans can go as low as 3% for first-time buyers, and VA and USDA loans require no down payment. PMI typically costs 0.5–1.5% of the loan amount per year until your equity reaches 20%. On a $350,000 loan, that is $1,750–$5,250 per year added to your housing costs. Weigh the cost of PMI against the benefit of buying sooner with a smaller down payment.
How do rising interest rates affect how much house I can afford?
Interest rates have a significant impact on purchasing power. At 4% interest, a $2,000/month principal and interest payment supports a loan of about $418,000. At 7% interest, that same $2,000/month only supports a loan of about $302,000 — roughly $116,000 less. When rates rise, either your budget for the home price must fall, your monthly payment must increase, or some combination of both. Use our Mortgage Payment Calculator to model different rate scenarios.
Once you have an idea of your price range, plug the numbers into our Mortgage Payment Calculator to see exactly what your monthly payment would look like at different purchase prices, down payments, and interest rates. You can also try the Mortgage Affordability Calculator to work backwards from your income.