Start with your monthly take-home pay, not your gross salary

The house payment you can afford depends on what you actually receive each month after taxes, not the salary number on your job offer. If you earn $60,000 a year, your take-home is closer to $3,600 to $3,800 monthly — that is the number to use for all the math that follows.

Pull your last two or three paychecks and add up what lands in your bank account. Include any regular income: salary, wages, bonuses you receive most years, child support, pension payments, or rental income. Do not count money that comes once or twice a year, or money you might earn in the future. You need the number that shows up reliably every month.

If your income varies — you work commission, seasonal work, or run your own business — use the average of the last two years. Lenders will ask for this anyway, so calculating it now saves time later.

Key Takeaways

  • Most lenders will not approve a mortgage where your total monthly debt payments exceed 43 percent of your take-home pay, which is the hard ceiling for most borrowers.
  • Your house payment includes the mortgage principal and interest, property taxes, homeowners insurance, and mortgage insurance if you put down less than 20 percent — not just the loan amount.
  • The 28 percent rule (housing costs should not exceed 28 percent of take-home pay) is stricter than the 43 percent debt rule and gives you a safer monthly target to work backward from.
  • Your down payment size directly affects what you can afford: a larger down payment lowers your monthly payment and removes the mortgage insurance requirement.
  • Existing debts — car loans, student loans, credit cards, personal loans — reduce the amount lenders will approve, so paying down debt before house hunting increases your buying power.

Understand the 28 percent housing rule and the 43 percent debt rule

Lenders use two main ratios to decide how much to lend you. The first is the 28 percent housing ratio: your monthly housing costs should not exceed 28 percent of your take-home pay. Housing costs include your mortgage payment (principal and interest), property taxes, homeowners insurance, and mortgage insurance if you are putting down less than 20 percent.

The second is the 43 percent debt-to-income ratio: your total monthly debt payments — including the new mortgage, car loans, student loans, credit cards, and any other regular payments — should not exceed 43 percent of your take-home pay. This is the absolute ceiling most lenders will not cross.

Here is a concrete example. If your take-home is $4,000 monthly: 28 percent of that is $1,120, and 43 percent is $1,720. Your housing payment should stay under $1,120. If you already pay $300 monthly on a car loan and $150 on student loans, your total debt payments are $450. Add the new mortgage, and you cannot exceed $1,720 total — meaning the mortgage itself can be no more than $970.

The 28 percent rule is stricter and gives you a safer target. The 43 percent rule is what lenders actually enforce, but it assumes you are comfortable carrying more total debt. Use 28 percent as your planning number unless you have very little existing debt.

Calculate what your monthly payment will actually be

The mortgage payment itself is only part of your housing cost. When lenders calculate whether you can afford a house, they add four things together: principal and interest, property taxes, homeowners insurance, and mortgage insurance (if applicable).

Principal and interest is what you pay the bank each month. A $300,000 loan at 7 percent interest over 30 years costs roughly $1,996 monthly. A $400,000 loan at the same rate costs roughly $2,661. Use an online mortgage calculator to find the exact number for the loan amount and interest rate you expect.

Property taxes vary dramatically by location. Some states charge 0.3 percent of home value annually; others charge 1.5 percent or more. A $400,000 home in a low-tax state might cost $100 monthly in property tax; the same home in a high-tax state could cost $500 monthly. Call your county assessor's office or search their website for the tax rate in the neighborhoods you are considering.

Homeowners insurance typically costs $800 to $1,500 annually, or $65 to $125 monthly, depending on the home's age, location, and whether it is in a flood zone. Get quotes from at least two insurers for the specific house you are considering.

Mortgage insurance (PMI) is required if you put down less than 20 percent. It costs 0.5 to 1.5 percent of the loan amount annually. On a $320,000 loan, that is $160 to $480 monthly. You can remove it once you reach 20 percent equity, but you pay it upfront.

Add all four together. That is your true monthly housing cost.

Work backward from what you can afford to find your price range

Once you know your maximum monthly payment (28 percent of take-home, minus any existing debt), you can reverse-engineer the home price you can afford.

Subtract your property tax, insurance, and mortgage insurance estimates from your maximum payment. What remains is what you can spend on principal and interest. Use a mortgage calculator in reverse: enter the monthly payment you can afford, the interest rate you expect, and a 30-year term. The calculator will show you the loan amount.

Then add your down payment. If you can put down $80,000 and the calculator says you can borrow $320,000, your price range is $400,000.

Example: Your take-home is $5,000 monthly. Twenty-eight percent is $1,400. Your property tax estimate is $250 monthly, insurance is $100, and mortgage insurance is $200. That leaves $850 for principal and interest. A mortgage calculator shows that $850 monthly buys you a $120,000 loan at 7 percent over 30 years. Add your $40,000 down payment, and your affordable price range is $160,000.

This math feels tight because it often is. If the number surprises you, the issue is usually one of three things: your down payment is smaller than you expected, property taxes in your area are higher than you assumed, or your existing debt is eating into your borrowing power.

Reduce your existing debt to increase your buying power

Every dollar you pay monthly on a car loan, student loan, credit card, or personal loan reduces the amount a lender will approve for a mortgage. If you have six months before you plan to buy, paying down these debts is often more effective than saving for a larger down payment.

The math is straightforward. If you pay off a $300 monthly car payment, your debt-to-income ratio improves by $300. At the 43 percent ceiling, that frees up roughly $700 in new mortgage borrowing power (because $300 is 43 percent of about $700). Over a 30-year loan, that is tens of thousands of dollars in additional home price you can afford.

Credit card balances count against you even if you pay them in full each month. Lenders assume you will carry a balance and calculate 5 percent of your credit limit as a monthly debt payment. If you have a $10,000 credit limit, lenders count $50 monthly against your debt ratio, whether you use it or not. Paying down or closing high-limit cards before explore for a mortgage improves your ratio.

Student loans are trickier. If you are on an income-driven repayment plan, lenders use your actual monthly payment. If you have not started repayment yet, they estimate 0.5 to 1 percent of the total balance as your monthly payment. Paying these down helps, but the effect is smaller than paying off a car loan.

Account for the size of your down payment

A larger down payment does two things: it lowers your monthly payment and it removes the mortgage insurance requirement once you reach 20 percent down.

If you put down 5 percent on a $400,000 home, you borrow $380,000 and pay mortgage insurance. If you put down 20 percent, you borrow $320,000 and skip the insurance. The difference in monthly payment is substantial — often $200 to $400 depending on the loan size and interest rate.

This means the same monthly budget can buy you a more expensive home if you have saved a larger down payment. A buyer with $40,000 down might afford a $300,000 home; a buyer with $100,000 down might afford a $450,000 home, even if both have the same monthly income and existing debt.

Down payment size also affects the interest rate you receive. Borrowers with 20 percent down typically get better rates than those with 5 or 10 percent down. A 0.5 percent difference in interest rate changes your monthly payment by $150 to $250 on a typical loan, which compounds over 30 years.

Get pre-approved to confirm the lender's number matches yours

Your own math is a starting point, but a lender's pre-approval is the real answer. Pre-approval means a lender has reviewed your income, debts, credit history, and assets and committed to lending you up to a specific amount.

To get pre-approved, contact a mortgage lender or bank and provide recent pay stubs, tax returns (usually the last two years), bank statements, and a list of your debts. The lender will pull your credit report and run the same debt-to-income calculations you did, but with access to your actual credit history and verified income.

Pre-approval usually takes three to five business days. The letter you receive states the maximum loan amount, the interest rate (or rate range), and any conditions — such as providing a final employment verification before closing.

Your pre-approval number may be higher or lower than your own calculation. If it is lower, ask the lender why: sometimes it is a debt you forgot to mention, sometimes it is a credit score issue, and sometimes it is the lender's own policy being stricter than the 43 percent standard. If it is higher, do not assume you should spend it all. Your own 28 percent calculation is still a safer guide to what you can comfortably afford.

Frequently Asked Questions

Should I use my gross income or take-home pay to calculate what I can afford?

Use take-home pay. Your gross salary is what you earn before taxes and deductions; take-home is what actually lands in your bank account each month. Lenders use take-home because that is the money available to pay your mortgage. If you earn $60,000 gross, your take-home is typically $3,600 to $3,800 monthly, and that is the number to plug into the 28 percent and 43 percent rules.

Does my student loan debt count against me if I am still in school?

Yes. Lenders count student loans in your debt-to-income ratio even if you are not yet making payments. They typically estimate 0.5 to 1 percent of your total balance as a monthly payment. If you have $50,000 in student loans, lenders assume you will pay $250 to $500 monthly, which reduces your mortgage approval. Once you start making actual payments, lenders use your real payment amount instead.

What if my income is irregular or seasonal?

Lenders average your income over the last two years. If you work commission, seasonal jobs, or run your own business, provide tax returns for the past two years and bank statements showing deposits. Lenders will use the lower of the two years or an average, depending on the trend. If your income is rising, you may be able to use an average; if it is falling, they will use the lower year to be conservative.

Can I afford a house if I have a lot of credit card debt?

Credit card debt reduces your borrowing power significantly. Lenders count 5 percent of your total credit limit as a monthly debt payment, even if you pay the balance in full. If you have $50,000 in credit limits across multiple cards, lenders assume $2,500 monthly in potential debt, which eats into your mortgage approval. Paying down or closing high-limit cards before explore improves your ratio and can increase your approval amount by tens of thousands of dollars.

What is the difference between pre-approval and pre-qualification?

Pre-qualification is informal: you tell a lender your income and debts, and they give you a rough estimate of what you might borrow. Pre-approval is formal: the lender verifies your income with tax returns and pay stubs, pulls your credit report, and confirms they will lend you a specific amount. Pre-approval is what sellers take seriously when you make an offer. Always get pre-approved before house hunting.