How Much Mortgage Can I Afford? Understanding Your Budget and Avoiding Being House Poor

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Buying a home is one of the biggest financial decisions you’ll make. It’s exciting but can also feel overwhelming. A common question for potential homeowners is:

How much mortgage can I afford?

The answer isn’t just about how much a bank is willing to lend you—it’s also about what fits comfortably within your budget. Without careful planning, you could end up “house poor,” spending so much on your home that it becomes hard to afford anything else.

This guide will help you understand how to calculate your mortgage affordability, balance lender approvals with your financial comfort, and avoid the trap of being house poor.


What Is a Mortgage, and How Is It Calculated?

A mortgage is a loan used to buy a home. When you take out a mortgage, you agree to repay the lender over a set period, often 15, 20, or 30 years. Each month, you’ll make payments that cover:

  • Principal: The amount you borrowed.
  • Interest: The cost of borrowing money.
  • PMI: If you put less than 20% down, you’ll likely pay mortgage insurance, which protects the lender in case you stop making payments
  • Escrows: This is a pay-as-you-go tool which divides your annual property tax and homeowners insurance bill into monthly installments. The lender holds this money in an escrow account and makes your tax and insurance payments for you when they are due.

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How Much Mortgage Can I Afford?

The 28/36 Rule

A common guideline for determining affordability is the 28/36 rule:

  • 28% Rule: Your mortgage payment (including taxes and insurance) should be no more than 28% of your gross monthly income.
  • 36% Rule: Your total monthly debts (mortgage, credit cards, car loans, etc.) should not exceed 36% of your gross monthly income.

Example: If your gross monthly income is $5,000:

  • 28% of $5,000 = $1,400 (maximum monthly mortgage payment).
  • 36% of $5,000 = $1,800 (maximum total debt payments).

Staying within these limits helps ensure you’ll have money for other expenses and savings. However, keep in mind that these percentages are guidelines and may not account for unique financial situations like childcare expenses or irregular income.

[Related Reading: Understanding Mortgage Interest Rates: What Every Homebuyer Needs to Know]

Debt-to-Income (DTI) Ratio

While good for budgeting, lenders do not use the 28/36 rule to determine how much you qualify for. Lenders use a metric called debt-to-income ratio (DTI) which is the percentage of your gross monthly income that goes toward debt payments.

There are actually two parts of this calculation. The housing ratio is your mortgage – including taxes, insurance and HOA dues (if application) – divided by your gross income.

Example:

  • Gross income: $5,000 /month
  • $1,600 (mortgage)
  • DTI: $1,600 ÷ $5,000 = 20%

The total ratio adds your existing obligations – car loans, credit cards, student loans, child support, etc. – divided by your gross income.

Example:

  • Gross income: $5,000 /month
  • $1,600 (mortgage) + $500 (student loan) + $300 (car payment) + $100 (credit card minimum payment) = $2,500
  • DTI: $2,500 ÷ $5,000 = 50%

The DTI in this case would be 20/50 – a 20% housing ratio and a 50% total ratio. These are sometimes referred to as “front end” and “back end” ratios, respectively.

There are rare exceptions, but here are the generally accepted maximum allowable DTI ratios by loan type:

  • FHA: 46.99%/56.99%
  • Conventional: 49.99%/50.49%
  • USDA: 34%/41%
  • VA: No maximum
  • Jumbo: Varies, generally 38%/45%

These maximums can vary depending on your credit score, credit history and other compensating factors. And again, just because the lender can approve you for a certain amount doesn’t mean it’s going to work for your budget.

[Related Reading: understanding-credit-scores-and-mortgages]


Factors to Consider:

  • Monthly Expenses: Account for utilities, groceries, and entertainment. For example, a larger home may have higher utility bills or maintenance costs.
  • Emergency Savings: Keep funds for unexpected costs like medical bills or car repairs. Experts recommend saving three to six months’ worth of expenses.
  • Future Goals: Plan for retirement, vacations, or paying off student loans. For instance, will a larger mortgage impact your ability to save for your child’s education?
  • Lifestyle Preferences: Balance homeownership with financial flexibility. If travel or hobbies are priorities, ensure your mortgage leaves room for these.

[Related Reading: choosing-the-right-home-for-your-needs]


Hidden Costs of Homeownership

Owning a home involves more than just a mortgage payment. To accurately calculate what you can afford, consider additional costs:

  • Property Taxes: These vary by location and can increase over time.
  • Homeowner’s Insurance: Protects your home from damage or liability.
  • Maintenance and Repairs: Budget for upkeep like roof repairs, plumbing fixes, or landscaping.
  • HOA Fees: If you’re buying a condo or a home in a planned community, you may need to pay monthly homeowners’ association fees.

These hidden costs can add hundreds of dollars to your monthly expenses, so include them in your affordability calculations.


How to Avoid Being House Poor

1. Stick to a Realistic Budget

Create a budget that includes your mortgage, utilities, savings, and discretionary spending. Ensure it leaves room for flexibility. Tools like budgeting apps can help track your expenses and identify areas to cut back if needed.

2. Plan for Long-Term Stability

Think about potential income changes or life events, like starting a family or switching careers. Choose a mortgage amount that works even if circumstances change. For instance, consider how a job loss or a medical emergency might affect your ability to make payments.

3. Build an Emergency Fund

Unexpected home repairs or rising property taxes can strain your finances. Aim to save three to six months of expenses for emergencies. This cushion can also help you avoid relying on high-interest credit cards for unexpected costs.

4. Buy Within Your Means

A smaller or more affordable home might provide the financial freedom to enjoy other aspects of life, like travel or hobbies. For example, opting for a $250,000 home instead of a $300,000 one could save you hundreds of dollars each month.


Final Thoughts

Knowing how much mortgage you can afford is about more than lender approval. It’s about creating a budget that supports your financial health and life goals. By understanding what goes into your DTI and prioritizing your comfort over maximum borrowing, you can avoid becoming house poor and enjoy a balanced, secure lifestyle.

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