One of the most important questions before buying a home is: how much can I actually afford? Banks have specific rules and ratios they use to determine your maximum loan amount, and understanding these can help you set realistic expectations.
The 28/36 Rule
The most widely used guideline in mortgage lending is the 28/36 rule:
- 28% Rule: Your monthly housing costs (mortgage payment, property tax, insurance, HOA) should not exceed 28% of your gross monthly income.
- 36% Rule: Your total monthly debt payments (housing + car loans + student loans + credit cards) should not exceed 36% of your gross monthly income.
For example, if your household earns $6,000/month gross, your maximum housing payment should be $1,680 (28%) and your total debt payments should stay under $2,160 (36%).
Debt-to-Income Ratio (DTI)
Banks calculate your DTI by dividing your total monthly debt obligations by your gross monthly income. There are two types:
- Front-end DTI: Housing costs only (target: under 28%)
- Back-end DTI: All debts including housing (target: under 36%, some lenders allow up to 43%)
A lower DTI means you're a less risky borrower and may qualify for better interest rates.
What Counts as Income?
Lenders typically consider:
- Base salary (gross, before taxes)
- Bonuses and commissions (if consistent for 2+ years)
- Rental income (usually 75% of actual rent received)
- Self-employment income (average of last 2 years' tax returns)
- Alimony/child support received
Hidden Costs Most Buyers Forget
The purchase price is just the beginning. Factor in:
- Property taxes: 0.5% - 2.5% of home value annually
- Home insurance: $1,000 - $3,000/year
- Maintenance: Budget 1-2% of home value per year
- Utilities: Often higher than renting
- HOA fees: $200 - $500/month in some areas
- PMI: 0.5% - 1% annually if down payment is under 20%
The Down Payment Factor
Your down payment significantly affects affordability:
- 20% down: No PMI required, lower monthly payments
- 10% down: PMI required but more accessible
- 3-5% down: FHA/conventional options exist but monthly costs are higher
A larger down payment means a smaller loan, lower monthly payments, and often a better interest rate.
How Interest Rates Affect Buying Power
Interest rates dramatically impact how much house you can afford. For every 1% increase in rates, your buying power drops approximately 10%.
At 6% interest, a $2,000/month payment supports a ~$333,000 mortgage. At 7%, that same payment only supports ~$300,000.
Stress Testing Your Budget
Don't just calculate what you CAN borrow — calculate what you SHOULD borrow. Consider:
- What if interest rates rise at renewal?
- What if one income is lost temporarily?
- Can you still save for retirement and emergencies?
- Will you have money for home maintenance and improvements?
A conservative approach: aim for housing costs at 25% of take-home pay (not gross), leaving buffer for life's surprises.
Use our Home Affordability Calculator to find your comfortable price range based on your specific situation.
How Much House Can I Afford? Complete Guide
Determining the maximum you can spend on buying a home is one of the most important steps before starting your property search. Lenders and regulators set specific limits that determine how much you can borrow, regardless of what you might want to spend.
Key Affordability Ratios
Debt-to-Income (DTI): Most lenders require total monthly debt payments (including the new mortgage) to be no more than 43-50% of gross monthly income. Many financial advisors recommend keeping housing costs below 28-30% of gross income.
Loan-to-Value (LTV): The maximum loan amount as a percentage of the property value. Most lenders require a minimum 10-20% deposit, meaning maximum LTV of 80-90%.
Stress Testing: Many regulators require lenders to test affordability at higher interest rates (typically +2-3% above the current rate) to ensure borrowers can still afford payments if rates rise.
How to Calculate Your Maximum Purchase Price
Step 1 — Calculate net monthly household income: Add the net incomes of all mortgage applicants.
Step 2 — Apply the DTI limit: Maximum monthly payment = 50% of net income minus existing debt payments.
Step 3 — Calculate maximum borrowing: Using the maximum payment, current interest rate, and desired term, calculate the maximum loan amount.
Step 4 — Add your deposit: Maximum purchase price = maximum loan divided by maximum LTV (80-90%).
Step 5 — Subtract transaction costs: Stamp duty, legal fees, surveys, and other costs typically represent 3-8% of purchase price and must come from savings.
The Comfort Zone vs. Maximum Borrowing
The regulatory maximum is not the recommended amount. Most financial advisors suggest keeping housing costs below 30-35% of net income to maintain adequate financial resilience for unexpected expenses, job changes, or interest rate increases.
Use our Affordability Calculator to calculate the exact figures for your specific situation.