You earn $80,000/year and have $20,000 saved for a down payment. How much house can you afford? Most people guess by dividing their salary by 3 or 4, assuming they can borrow $240,000-320,000. But lenders use a more conservative metric: the 28% debt-to-income ratio (housing costs shouldn't exceed 28% of gross income). On $80,000/year, that's $1,866/month for all housing costs—”mortgage, insurance, taxes, HOA. A $300,000 home with a $280,000 mortgage at 7% interest costs roughly $1,860/month in principal+interest alone, leaving almost nothing for taxes, insurance, and HOA. In high-tax states like California or New Jersey, that monthly payment includes property taxes that eat 30-40% of the total payment. You'd qualify for a $200,000 home, not $300,000.
Lenders also look at your full debt-to-income ratio (43% max, including car loans, credit cards, student loans, and the mortgage). A $50,000 student loan with a $500/month payment reduces the mortgage you can afford by about $70,000. Down payment matters too: a 20% down payment ($60,000 on a $300,000 home) qualifies for better rates and avoids PMI (mortgage insurance, typically 0.5-1.5% of loan amount annually). A 3% down payment ($9,000 on that same $300,000 home) triggers PMI, adding $150-375/month to your payment, so your true monthly cost is higher. Credit score also affects rates: a 750 score gets 6.5%, a 650 score gets 7.5%, costing nearly $2,000 more per year on that $280,000 mortgage.
This calculator shows your maximum affordable home price based on your income, down payment, existing debts, interest rate assumptions, and property tax rates (varies by state). It uses realistic assumptions: 28% housing DTI, 43% total DTI, includes taxes and insurance, and factors in PMI if down payment is under 20%. Enter your situation and you'll see the real price you qualify for—”not the bank's maximum (which over-stretches most buyers). This number helps you narrow your home search to realistic neighborhoods and prevent falling in love with properties you can't afford.
The 28% Debt-to-Income Rule
Most lenders cap your housing payment at 28% of your gross monthly income. This is called the front-end ratio. Your housing payment includes mortgage, property tax, insurance, and HOA fees. If you earn ,000 annually (,333 monthly), lenders allow about ,333 for housing. Any existing debt payments (car loans, credit cards, student loans) reduce this amount further.
Down Payment and Loan Amount
Your down payment is money you contribute upfront. The rest is financed through a mortgage. A larger down payment reduces your loan amount, monthly payment, and total interest paid. Down payments of 20% typically avoid private mortgage insurance (PMI), which adds cost. This calculator uses your down payment to determine the maximum loan amount you can afford.
Interest Rates and Loan Terms
Interest rates vary based on credit score, economic conditions, and loan type. A 1% change in interest rate significantly impacts affordability. A 30-year mortgage has lower monthly payments than a 15-year, but you pay much more interest over time. A 6.5% rate on a ,000 loan is ,896/month for 30 years versus ,530/month for 15 years.
Don't Forget Hidden Costs
Home affordability isn't just the mortgage payment. Include property taxes (vary by location), homeowners insurance, HOA fees (if applicable), and maintenance (typically 1% of home value annually). A ,000 home might have + in taxes/insurance monthly plus maintenance costs.
Getting Pre-Approved Before Shopping
Talk to a lender before house hunting. Pre-approval shows sellers you're serious and gives you an exact maximum you can borrow. Pre-approval requires income verification and a credit check but isn't a commitment to borrow. You'll know exactly how much mortgage you qualify for, preventing disappointment later.