Start with your gross monthly income, then subtract what you already owe

The amount you can afford to pay toward a house each month depends on two things: how much money comes in, and how much already goes out. Lenders use a formula called the debt-to-income ratio, or DTI. It measures what percentage of your monthly income goes to debt payments — including the new mortgage payment you're asking for.

Most lenders will not approve a mortgage if your total monthly debt payments (car loans, student loans, credit cards, the new mortgage, property taxes, insurance, and homeowners association fees) exceed 43 percent of your gross monthly income. Some lenders go as high as 50 percent if you have a strong credit score and savings, but 43 percent is the standard threshold. A few lenders will go lower — around 36 percent — if you're borrowing a smaller amount or putting down a large down payment.

To find your number: multiply your gross monthly income by 0.43. That's the total debt payment the lender will allow. Subtract what you already pay each month on car loans, student loans, credit cards (use the minimum payment), and any other debts. What's left is the maximum the lender will approve for your mortgage payment, property taxes, homeowners insurance, and mortgage insurance combined.

Key Takeaways

  • Lenders typically cap your total monthly debt payments at 43 percent of your gross monthly income, though this varies by lender and your financial profile.
  • Your affordable house payment is what remains after you subtract your existing debt payments from that 43 percent threshold.
  • Property taxes, homeowners insurance, and mortgage insurance all count toward your housing payment limit — they are not separate from it.
  • A down payment of 20 percent or more eliminates mortgage insurance and lowers your monthly payment, making a higher purchase price affordable.
  • Your credit score affects the interest rate you receive, which changes your monthly payment on the same loan amount by hundreds of dollars.

How property taxes and insurance shrink your actual mortgage amount

The mortgage payment itself — principal and interest — is only part of what you owe each month. Lenders bundle in property taxes, homeowners insurance, and mortgage insurance (if your down payment is less than 20 percent). These are called PITI when you include principal, interest, taxes, and insurance.

Property taxes vary wildly by location. In some counties they run 0.3 percent of the home's value per year; in others they're 2 percent or higher. A $300,000 home in a low-tax area might cost $75 per month in property tax; the same home in a high-tax area could cost $500 per month. You can look up the tax rate for any county or municipality online, or ask a local real estate agent what taxes run in the neighborhoods you're considering.

Homeowners insurance typically costs $100 to $300 per month depending on the home's value, location, and your claims history. Mortgage insurance (PMI) applies if you put down less than 20 percent and costs roughly 0.5 to 1.5 percent of the loan amount per year, divided into monthly payments. A $240,000 loan with PMI might add $100 to $300 per month.

All of these stack up. If your lender says you can afford a $1,500 housing payment, and your property taxes and insurance total $400, you have only $1,100 left for principal and interest on the actual mortgage. That shrinks the loan amount you can take on significantly.

Interest rates and credit scores change what you can borrow

Two people approved for the same $1,100 monthly mortgage payment will borrow different amounts if they have different interest rates. A borrower with a 680 credit score might pay 7.5 percent interest; a borrower with a 760 score might pay 6.5 percent. Over a 30-year loan, that one percentage point difference means the higher-credit borrower can borrow roughly $60,000 more for the same monthly payment.

Interest rates also move with the broader economy. When the Federal Reserve raises rates, mortgage rates rise; when it cuts rates, mortgage rates fall. You cannot control the broader rate environment, but you can control your credit score. Paying bills on time, keeping credit card balances below 30 percent of your limit, and not opening new accounts right before you explore for a mortgage all help your score.

If your credit score is below 700, consider waiting six to twelve months to improve it before you explore. The interest rate savings alone could let you afford a home $50,000 to $100,000 higher in price, depending on the loan amount and term.

Down payment size affects both your monthly payment and your approval odds

A larger down payment lowers your monthly payment in two ways. First, you borrow less money, so principal and interest are lower. Second, if you put down 20 percent or more, you avoid mortgage insurance entirely, which removes $100 to $300 from your monthly bill.

Putting down 10 percent instead of 5 percent on a $300,000 home means borrowing $270,000 instead of $285,000. The difference in principal and interest alone is roughly $150 per month. Add in the mortgage insurance savings, and you're looking at $250 to $350 per month lower. That's $3,000 to $4,200 per year.

Down payment size also affects whether a lender will approve you at all. If your debt-to-income ratio is already at 42 percent, a lender might deny you. But if you put down 25 percent instead of 10 percent, your monthly payment drops, your DTI falls to 40 percent, and you get approved. Conversely, if you're stretching to afford a home, a smaller down payment makes the monthly payment unaffordable.

The difference between what you can afford and what you should afford

A lender's approval is not the same as a safe budget. Just because a lender will approve you for 43 percent of your income does not mean you should spend that much. Many financial advisors recommend keeping your housing payment to 28 percent of gross income or less, leaving more room for emergencies, retirement savings, and other goals.

If you're approved for a $2,000 monthly payment but your income is $5,000 per month, that payment is 40 percent of your income. One job loss, one major repair, one medical bill, and you're in trouble. A $1,400 payment (28 percent) leaves you $600 per month to absorb unexpected costs.

Consider also what happens if interest rates rise on an adjustable-rate mortgage, if your property taxes increase (they usually do), or if your homeowners insurance premium jumps (it often does after a claim or in high-risk areas). The payment you can afford today may not be the payment you can afford in five years.

How to estimate your affordable payment before you talk to a lender

Start with your gross monthly income. Multiply it by 0.43 to find your maximum total debt payment. Write down every monthly debt payment you currently make: car loans, student loans, minimum credit card payments, personal loans, anything else. Subtract that total from your 0.43 number.

What remains is your housing budget. Now subtract an estimate for property taxes and insurance. Use 1 percent of the home's purchase price as a rough annual property tax estimate (adjust up or down based on your county's rate), and $150 per month for insurance as a starting point. Divide the annual tax by 12 and add it to the insurance estimate. That's your monthly PITI cushion.

Subtract that cushion from your housing budget. What's left is the maximum principal and interest payment you can afford. Use an online mortgage calculator to see what loan amount that payment supports at current interest rates. That loan amount, plus your down payment, is roughly the maximum home price you should consider.

This is an estimate, not a may provide. Actual approval depends on your credit score, employment history, savings, and the lender's specific rules. But it gives you a realistic starting point before you spend time looking at homes you cannot afford.

When your debt-to-income ratio blocks you from buying

If your DTI is too high, you have three options: increase your income, decrease your debt, or wait. Increasing income is the hardest — it requires a job change or a second income source. Decreasing debt is more realistic. Paying off a car loan or credit card before you explore for a mortgage can free up $200 to $500 per month in your DTI calculation, which might be enough to get approved.

Paying off a $10,000 credit card balance, for example, removes the minimum payment (usually $200 to $300) from your DTI. That alone can lower your ratio by 4 to 6 percentage points, which might move you from 45 percent (denied) to 39 percent (approved). The tradeoff is that you delay your home purchase by six to twelve months while you pay down the debt.

Some people take a third route: buy a less expensive home now, build equity, and upgrade later. A $250,000 home might be affordable when a $350,000 home is not. After three to five years of payments, your income may have risen, your debt may have fallen, and your home equity gives you a larger down payment for the next purchase.

Frequently Asked Questions

What if I have irregular income or I'm self-employed?

Lenders typically average your income over the past two years and may ask for tax returns, profit-and-loss statements, and bank statements to verify it. If your income is rising, they may use the most recent year. If it's falling, they use an average. Self-employed borrowers often need stronger credit scores and larger down payments to offset the income uncertainty.

Does my spouse's income count if we're not married?

No. Only income that is legally yours counts toward your DTI. If you're married, both spouses' incomes count, and both are responsible for the debt. If you're unmarried, only the person on the mortgage process counts, even if you live together and share expenses.

Can I get approved for more if I have a co-signer?

Yes. A co-signer's income and debts both count toward the DTI calculation. If your co-signer has strong income and low debt, they can help you may have access to for a larger loan. However, they are legally responsible for the full mortgage if you stop paying, so lenders scrutinize the co-signer's finances as closely as yours.

What if I want to put down less than 20 percent?

You can, but you'll pay mortgage insurance, which raises your monthly payment. A 10 percent down payment costs roughly 0.8 to 1.2 percent of the loan per year in PMI; a 5 percent down payment costs 1.5 to 2 percent per year. The lower your down payment, the higher the insurance cost and the lower the loan amount you can afford on the same monthly budget.

Should I max out what the lender approves me for?

Not necessarily. Lenders approve based on debt-to-income ratio, not on whether you can comfortably afford the payment long-term. Many financial advisors recommend staying at 28 percent of gross income for housing, which leaves room for emergencies, savings, and other expenses. Maxing out your approval leaves little cushion if your income drops or unexpected costs arise.