Most buyers approach home affordability backwards — they fall in love with a house and then try to figure out if they can afford it. The result is often a stretched mortgage that dominates their finances for 30 years. Starting with your numbers instead of a Zillow search changes the entire process.

The 28/36 Rule

Lenders use two ratios to assess affordability:

  • Front-end ratio (28%): Your housing costs (mortgage principal, interest, taxes, insurance — PITI) should not exceed 28% of your gross monthly income.
  • Back-end ratio (36–43%): All debt payments combined (housing plus car loans, student loans, credit card minimums) should not exceed 36–43% of gross monthly income.

These are Fannie Mae / Freddie Mac guidelines used by most conventional lenders. FHA loans and some portfolio lenders allow higher ratios for strong borrowers.

How to Calculate Your Maximum Home Price

Step 1: Find your maximum monthly payment.

Max Payment = Gross Monthly Income × 0.28

On a $85,000 annual income ($7,083/month gross), max payment = $7,083 × 0.28 = $1,983/month.

Step 2: Back-solve the mortgage formula to find the maximum loan amount.

Max Loan = Max Payment × [(1+r)^n − 1] / [r × (1+r)^n]

At 7% for 30 years, a $1,983/month payment supports a loan of approximately $298,000.

Step 3: Add your down payment.

Max Home Price = Max Loan + Down Payment

With $50,000 down, max home price = $298,000 + $50,000 = $348,000.

The Home Affordability Calculator does all of this in one step, including calculating your back-end DTI with your existing debts.

What Lenders Actually Look At

DTI ratios are only part of the picture. Lenders also evaluate:

  • Credit score: Scores above 740 get the best rates. Below 620 limits your loan options significantly.
  • Down payment: Higher down payment = lower LTV = lower rate and no PMI above 20%.
  • Employment history: 2 years of stable employment is the standard requirement.
  • Assets and reserves: Lenders want to see 2–6 months of mortgage payments in savings after closing.
  • Type of income: W-2 income is easiest to document. Self-employment income requires 2 years of tax returns and averages them.

The Hidden Costs of Homeownership

Your mortgage payment is not your full housing cost. Budget for:

  • Property taxes: 0.5–2.5% of home value annually depending on location.
  • Homeowner's insurance: Typically $100–$200/month.
  • PMI: 0.5–1.5% of loan amount annually if down payment is below 20%.
  • Maintenance: Budget 1–2% of home value per year — not as monthly costs, but as an annual reserve.
  • HOA fees: Can range from $50 to $1,000+/month depending on the community.

A rule of thumb: budget total monthly housing costs at 30–35% of gross income to maintain financial breathing room. Use the Mortgage Calculator to model the exact payment at any price point.

Preapproval vs Prequalification

Prequalification is an informal estimate based on stated information — not verified by the lender. Preapproval is a formal review of your income, assets, credit, and debt. In competitive markets, sellers often will not consider offers without a preapproval letter. Get preapproved before you start seriously looking, so you know your real budget and can move quickly when you find the right property.