Buying a home is one of the biggest financial decisions you'll make. Understanding how much house you can truly afford, not just what a lender will approve, is essential to avoid becoming house poor. This guide walks through the math behind home affordability, explains the 28/36 rule, and shows real examples at different income levels.
Step 1: Calculate Your Gross Monthly Income
Start with your annual salary before taxes. If you earn $75,000 per year, divide by 12 to get your gross monthly income:
$75,000 ÷ 12 = $6,250 per month
If you have additional income sources (bonuses, freelance work, rental income), you can include those if they're consistent and documented for at least two years. Lenders typically require proof of stability before counting variable income.
Step 2: Apply the 28% Front End Ratio
The front end ratio, also called the housing ratio, limits your monthly housing costs to 28% of your gross monthly income. This includes:
- Principal and interest on your mortgage
- Property tax
- Homeowners insurance
- HOA fees (if applicable)
- PMI (private mortgage insurance, if down payment is less than 20%)
For our $75,000 salary example:
$6,250 × 0.28 = $1,750 maximum monthly housing payment
This $1,750 is your total housing budget. If your property tax is $250/month, insurance is $100/month, and PMI is $150/month, you have $1,250 left for principal and interest.
Step 3: Check the 36% Back End Ratio
The back end ratio includes all your monthly debt obligations, not just housing:
- Housing costs (same as front end)
- Car loan payments
- Student loan payments
- Credit card minimum payments
- Personal loans
Using our $75,000 salary:
$6,250 × 0.36 = $2,250 maximum total monthly debt
If you currently pay $300/month for a car loan and $200/month for student loans, that's $500 in existing debt. Subtract this from your $2,250 limit:
$2,250 $500 = $1,750 available for housing
Notice how both the front end (28%) and back end (36%) calculations arrive at the same $1,750 housing budget in this example. If you had more existing debt, the back end ratio would be the limiting factor.
Step 4: Use a Mortgage Calculator to Reverse Engineer Your Budget
Now that you know your maximum monthly payment, use a mortgage calculator to determine your maximum home price. Input the following:
- Monthly payment: $1,250 (for principal and interest, after subtracting taxes, insurance, PMI)
- Interest rate: 6.5% (current average for 2025)
- Loan term: 30 years
- Down payment: 20% (to avoid PMI) or 3.5% (FHA minimum)
With a $1,250 monthly principal and interest payment at 6.5% for 30 years, you can afford a loan amount of approximately $198,000.
If you put 20% down, your total home price would be:
$198,000 ÷ 0.80 = $247,500 home price
Add property tax ($250/month), insurance ($100/month), and you're at $1,600/month total housing cost, well within the $1,750 budget.
Real World Examples at Different Income Levels
Example 1: $75,000 Annual Salary
- Gross monthly income: $6,250
- Maximum housing payment (28%): $1,750
- Estimated home price: $280,000 (with 20% down)
- Down payment needed: $56,000
- Monthly payment breakdown:
- Principal & interest: $1,410
- Property tax: $210
- Insurance: $130
- Total: $1,750
Example 2: $100,000 Annual Salary
- Gross monthly income: $8,333
- Maximum housing payment (28%): $2,333
- Estimated home price: $375,000 (with 20% down)
- Down payment needed: $75,000
- Monthly payment breakdown:
- Principal & interest: $1,890
- Property tax: $280
- Insurance: $163
- Total: $2,333
Example 3: $150,000 Annual Salary
- Gross monthly income: $12,500
- Maximum housing payment (28%): $3,500
- Estimated home price: $560,000 (with 20% down)
- Down payment needed: $112,000
- Monthly payment breakdown:
- Principal & interest: $2,830
- Property tax: $420
- Insurance: $250
- Total: $3,500
Important Factors That Affect Affordability
1. Interest Rates
Interest rates have a massive impact on affordability. A 1% increase in rates can reduce your buying power by 10% to 15%. At 6.5%, a $300,000 loan costs $1,896/month. At 7.5%, the same loan costs $2,098/month, that's $202 more per month or $72,720 over 30 years.
2. Property Taxes
Property tax rates vary dramatically by location. California averages 0.73%, Texas averages 1.80%, and New Jersey averages 2.47%. On a $400,000 home:
- California: $2,920/year ($243/month)
- Texas: $7,200/year ($600/month)
- New Jersey: $9,880/year ($823/month)
Always research local tax rates before calculating affordability.
3. Down Payment Amount
Larger down payments reduce your loan amount, lowering monthly payments and eliminating PMI if you put down 20% or more. However, don't drain your emergency fund to maximize your down payment. Keep at least 6 months of expenses in savings after closing.
4. HOA Fees
If you're buying a condo or townhouse, HOA fees can range from $100 to $700+ per month. Lenders include these in your housing payment when calculating DTI ratios. A $400/month HOA fee reduces your maximum home price by approximately $60,000 to $80,000.
5. PMI (Private Mortgage Insurance)
If your down payment is less than 20%, you'll pay PMI, typically 0.5% to 1.5% of the loan amount annually. On a $300,000 loan, that's $1,500 to $4,500 per year ($125 to $375/month). You can request PMI removal once you reach 20% equity.
FHA Loans: More Flexible DTI Requirements
FHA loans allow higher DTI ratios, up to 43% or even 50% with strong compensating factors like:
- Large down payment (10% or more)
- Excellent credit score (680+)
- Significant cash reserves (6+ months of payments)
- Low existing debt
FHA loans require only 3.5% down but include both upfront (1.75% of loan amount) and annual mortgage insurance premiums (0.55% to 1.05%). While FHA loans can help you buy sooner, the higher DTI ratios leave less room for financial flexibility.
Beyond the Numbers: Other Considerations
1. Emergency Fund
Before buying, ensure you have 6 months of expenses saved beyond your down payment and closing costs. Homeownership comes with unexpected repairs, HVAC failures, roof leaks, appliance replacements, that can cost thousands.
2. Career Stability
Consider your job security and income trajectory. If you're in a volatile industry or anticipating a career change, you may want to aim for the lower end of your affordability range to maintain flexibility.
3. Future Plans
Will you start a family soon, requiring more space or a different neighborhood? Do you plan to stay in the area for at least 5 years? Buying and selling homes within a short timeframe incurs substantial costs (realtor fees, closing costs, moving expenses).
4. Lifestyle Priorities
Just because you qualify for a $500,000 home doesn't mean you should buy one. If you value travel, dining out, hobbies, or early retirement, consider buying below your maximum to preserve discretionary income.
Use Our Free Mortgage Calculator
Ready to run your own numbers? Use our free mortgage calculator to model different scenarios:
- Adjust interest rates to see how rate changes affect affordability
- Compare 15 year vs. 30 year loans
- Model the impact of extra payments on payoff timelines
- Calculate total interest paid over the life of the loan
The calculator includes fields for property tax, insurance, HOA fees, and PMI, giving you a complete picture of your monthly housing cost.
Quick Affordability Checklist
- Calculate gross monthly income (annual salary ÷ 12)
- Apply 28% rule for maximum housing payment
- Check 36% rule for total debt limit
- Include all housing costs: tax, insurance, HOA, PMI
- Use a mortgage calculator to reverse engineer home price
- Factor in down payment (20% to avoid PMI is ideal)
- Keep 6 months emergency fund after closing
- Leave room for lifestyle and future goals
Frequently Asked Questions
What is the 28/36 rule for home affordability?
The 28/36 rule states that you should spend no more than 28% of your gross monthly income on housing costs (mortgage, property tax, insurance, HOA) and no more than 36% on total debt payments (housing plus car loans, credit cards, student loans). This guideline helps ensure you can comfortably afford your home while managing other financial obligations.
How much house can I afford with a $75,000 salary?
With a $75,000 annual salary and the 28% rule, you can afford approximately $280,000 to $300,000 in home price, assuming a 20% down payment, 6.5% interest rate, 1.2% property tax, and standard insurance. Your maximum monthly housing payment would be around $1,750.
What is the difference between front end and back end DTI ratios?
Front end DTI (debt to income) ratio only considers housing costs divided by gross income. Back end DTI includes all monthly debt payments (housing, car loans, credit cards, student loans) divided by gross income. Lenders typically want a front end ratio below 28% and back end ratio below 36%.
Can I afford more house with FHA loans?
Yes, FHA loans allow higher DTI ratios, up to 43% to 50% with compensating factors, compared to the conventional 36% guideline. FHA loans also require only 3.5% down payment. However, higher DTI ratios mean less financial cushion for emergencies or unexpected expenses.
Should I include HOA fees and PMI in my affordability calculation?
Absolutely. Lenders include HOA fees, PMI (if down payment is less than 20%), property tax, and homeowners insurance when calculating your housing payment for DTI ratios. These costs can add $300 to $600 or more to your monthly payment, significantly affecting how much house you can afford.
Final Thoughts
Understanding how much house you can afford requires more than just checking what a lender will approve. The 28/36 rule provides a conservative guideline that leaves room for savings, lifestyle spending, and financial emergencies. Use our mortgage calculator to explore different scenarios, and remember that buying below your maximum often leads to greater financial peace of mind.
When in doubt, aim for the lower end of your affordability range. You can always upgrade later, but stretching too thin from the start can lead to financial stress and limit your options down the road.