How Much House Can I Actually Afford?
The 28% Rule in Practice
Your monthly housing costs should not exceed 28% of your gross (pre-tax) monthly income. This includes:
- Mortgage principal + interest
- Property taxes
- Homeowner's insurance
- HOA fees (if any)
- PMI (if down payment < 20%)
Note: This is the "front-end ratio." Banks also look at the "back-end ratio" (total debt payments including car loans, student loans, etc.) — typically capped at 36-43%.
Quick Reference Table
| Gross Annual Income | 28% Max Monthly Housing | Approx. Home Price (30yr, 7% rate, 20% down) |
|---|---|---|
| $60,000 | $1,400 | ~$180,000 |
| $80,000 | $1,867 | ~$240,000 |
| $100,000 | $2,333 | ~$300,000 |
| $120,000 | $2,800 | ~$360,000 |
| $150,000 | $3,500 | ~$450,000 |
Home prices are approximate and vary significantly with interest rates. At lower rates, you can afford more home for the same payment.
The Total Cost of Ownership
The mortgage payment is only part of your monthly housing cost. A common mistake: comparing rent to a mortgage payment without adding in ownership costs.
Add to your monthly mortgage payment:
- Property taxes: ~1-1.5% of home value ÷ 12
- Homeowner's insurance: ~0.5% of home value ÷ 12
- Maintenance reserve: ~1% of home value ÷ 12
- PMI (if < 20% down): ~0.5-1% of loan amount ÷ 12
Example: $350,000 home, 20% down, 7% rate:
- Mortgage payment: ~$1,864
- Property tax (1.2%): $350
- Insurance (0.4%): $117
- Maintenance reserve: $292
- Total: ~$2,623/month
To stay at 28%, you'd need gross income of ~$112,000 for this house.
The 3-4x Annual Income Rule
A simpler guideline: your home price should be no more than 3-4x your gross annual income.
- $80,000 income → $240,000-$320,000 home
- $100,000 income → $300,000-$400,000 home
- $150,000 income → $450,000-$600,000 home
4x starts to stretch things. 5x and above is often too much for most financial goals to coexist comfortably.
The Down Payment Impact
A larger down payment reduces your monthly payment, eliminates PMI (below 80% LTV), and builds equity faster.
| Down Payment % | PMI Required? | Monthly Impact on $300K Home |
|---|---|---|
| 5% | Yes | Higher payment + $150+/mo PMI |
| 10% | Yes | Mid payment + $100-150/mo PMI |
| 20% | No | Standard payment, no PMI |
If you can't put 20% down, that's fine — but calculate the true monthly cost including PMI and factor it into the 28% test.
The Pre-Approval Trap
Mortgage lenders approve based on maximum debt-to-income ratios (often 43-50% back-end ratio). They are lending you as much as regulations allow, not as much as you should spend.
You can be approved for $500,000 while your real affordability is $350,000. The difference shows up in your savings rate, retirement contributions, and financial stress for years.
Run your own 28% calculation before using a lender's pre-approval as your shopping ceiling.
Financial Readiness Checklist
Before buying, you should have:
FAQ
What if I live in a high cost area where 3-4x income is impossible?
In cities like San Francisco, Seattle, or NYC, home prices routinely exceed 6-8x income. Many people there rent indefinitely, buy further from the city, or accept higher housing costs as a tradeoff for income and career opportunity. The 3-4x rule is a guideline, not a requirement — just understand the tradeoff clearly.
Should I include my partner's income?
If you're buying together and both incomes will contribute to the mortgage, use combined income. Make sure the purchase is affordable if one income were to stop.
→ Rent vs. Buy — Full comparison with interactive calculator