Start with your monthly take-home pay, not your gross salary
The house payment you can afford depends on what actually lands in your bank account each month, not what your employer says you earn. If you make $60,000 a year gross, taxes, Social Security, health insurance, and other deductions mean you take home roughly $3,800 to $4,200 monthly — that is the number to use.
Pull your last three pay stubs and add up what you actually receive. If your income varies — you work commission, seasonal work, or freelance — average the last two years of tax returns instead. Lenders will ask for this anyway, so doing it yourself first shows you what you are working with.
Key Takeaways
- Most lenders will approve a house payment up to 28 percent of your monthly take-home pay, though you may be comfortable with less.
- Your total monthly debt payments — car loans, credit cards, student loans, plus the new mortgage — should not exceed 36 to 43 percent of take-home pay.
- A house payment includes the mortgage principal and interest, plus property taxes, homeowners insurance, and possibly mortgage insurance, so the full monthly cost is higher than the loan payment alone.
- Down payment size, interest rates, and loan length all change your monthly payment, so running numbers through a mortgage calculator with your actual situation shows what you can realistically afford.
- Affordability and approval are different: a lender may approve you for more than you should actually spend.
The 28 percent rule: what lenders typically allow
Most mortgage lenders use a debt-to-income ratio to decide how much they will lend you. The first calculation is straightforward: take 28 percent of your monthly take-home pay. That is the maximum they usually allow for your housing payment alone.
If you take home $4,000 monthly, 28 percent is $1,120. That becomes your ceiling for the total monthly housing cost — not just the loan payment, but everything: mortgage principal and interest, property taxes, homeowners insurance, and mortgage insurance if your down payment is less than 20 percent. Many people assume the mortgage payment is the only number, then get surprised when the actual bill arrives higher.
Some lenders will go to 30 or 31 percent if you have strong credit and savings, but 28 is the standard starting point. If you are self-employed or have irregular income, expect them to be stricter.
The 36 percent rule: your total debt matters
Lenders also look at everything you owe each month, not just the house. Add your car payment, student loans, credit card minimums, and the new mortgage together. That total should not exceed 36 to 43 percent of your take-home pay — the exact percentage depends on the lender and your credit score.
Say you take home $4,000 monthly. At 36 percent, your total debt can be $1,440. If you already pay $300 on a car loan and $150 on student loans, you have $450 committed. That leaves $990 for the house payment. But at 28 percent of gross income, the house alone could be $1,120, which would push your total debt above the lender's limit.
This is where existing debt becomes a real constraint. Paying down a car loan or credit card before you buy can free up room in your debt budget for a larger mortgage.
What actually goes into your monthly house payment
The mortgage payment itself — principal and interest — is only part of what you owe each month. Property taxes, homeowners insurance, and possibly mortgage insurance are bundled into one payment, often called PITI (Principal, Interest, Taxes, Insurance).
Property taxes vary wildly by location. In some states they run 0.3 percent of home value yearly; in others, 1.5 percent or more. A $300,000 house in a high-tax area could cost $400 to $500 monthly just in property taxes. Homeowners insurance typically runs $100 to $200 monthly depending on the home and your location. If you put down less than 20 percent, mortgage insurance (PMI) adds another $100 to $300 monthly.
A mortgage calculator that includes taxes and insurance gives you the real number. Plugging in only the loan payment understates what you will actually owe.
How down payment size changes what you can afford
A larger down payment lowers your monthly payment in two ways: the loan amount is smaller, and you avoid mortgage insurance. A 20 percent down payment eliminates PMI entirely. Anything less triggers it.
On a $300,000 house, putting down 20 percent ($60,000) means borrowing $240,000. Putting down 5 percent ($15,000) means borrowing $285,000 — a $45,000 difference. At a 7 percent interest rate over 30 years, that difference is roughly $300 monthly in principal and interest alone, plus another $150 to $200 in mortgage insurance. The total gap is $450 to $500 per month.
If you are close to your affordability limit, saving for a larger down payment before you buy stretches your budget further than buying sooner with a smaller one.
Interest rates and loan length reshape your numbers
The interest rate you lock in changes your payment significantly. A $240,000 loan at 6 percent over 30 years costs roughly $1,440 monthly in principal and interest. The same loan at 8 percent costs about $1,760 — a $320 difference. Rates move daily, so your approval letter shows the rate you may have access to for based on your credit score and the lender's current pricing.
Shortening the loan term — borrowing over 15 years instead of 30 — lowers the total interest you pay but raises the monthly payment. A $240,000 loan at 6 percent over 15 years costs roughly $1,900 monthly. Over 30 years, it is $1,440. The 15-year option saves you tens of thousands in interest but requires a higher monthly payment. Most people choose 30 years because the payment fits their budget better, even though they pay more interest overall.
The difference between what you can afford and what you should spend
A lender approving you for $400,000 does not mean you should spend $400,000. Lenders optimize for their risk, not your financial health. They want to know you can make the payment; they do not care if the payment leaves you with no emergency fund or forces you to skip retirement savings.
A practical rule: your house payment should not exceed 25 to 28 percent of take-home pay, and your total debt should stay under 36 percent. If a lender approves you for more, that is their decision to make, not a signal that you should borrow it. Leave yourself breathing room for job loss, medical bills, or home repairs — a house always costs more than the payment.
Run your own numbers first using a mortgage calculator with your actual take-home pay, existing debt, and the down payment you can realistically save. That gives you a real affordability range before you talk to a lender.
Frequently Asked Questions
Should I use gross income or take-home pay to calculate what I can afford?
Use take-home pay — the amount that actually lands in your bank account. Lenders technically use gross income in their formulas, but they also account for taxes and deductions. For your own planning, take-home is more honest because it is the money you actually have to spend.
What if I have a co-borrower with separate income?
Lenders add both incomes together and explore the same ratios. If you take home $3,500 and your co-borrower takes home $2,500, the lender sees $6,000 total. Both of your debts count toward the total debt ratio, so existing loans from either person reduce how much house you can afford together.
Can I afford a house if I am self-employed?
Yes, but lenders typically average your income over two years and may allow a lower debt ratio. They want to see tax returns and sometimes profit-and-loss statements. If your income is growing, they may use an average that is lower than your current year. Start the conversation with a lender early so you know what documentation they need.
What happens to my affordability if interest rates rise before I close?
Your monthly payment rises, which may push you over your budget. If you are pre-approved at one rate and rates climb before closing, your actual payment could be $200 to $400 higher monthly. Some lenders offer a rate lock that holds your rate for 30 to 60 days. If rates are volatile, locking early protects you, but it may cost a small fee.
Should I max out what the lender approves me for?
No. Lender approval is based on whether you can technically make the payment, not whether the payment is wise for your situation. A safer approach is to stay at 25 percent of take-home pay for housing and 36 percent total for all debt. This leaves room for emergencies, home repairs, and life changes without financial strain.