How to Use This Calculator
This home affordability calculator helps you figure out how much house you can actually afford based on your income and debts. Here's what each field means:
- Gross Monthly Income: Your total income before taxes (all jobs combined)
- Monthly Debt Payments: Everything you currently pay each month—car loans, student loans, credit cards
- Down Payment Available: How much cash you have ready for a down payment
- Interest Rate: The mortgage rate you expect to qualify for
- Loan Term: Usually 15, 20, or 30 years
The 28/36 Rule: The Foundation of Home Affordability
Banks have a simple rule for lending money: they want to know you're not borrowing more than you can handle. That rule is called the 28/36 rule, and it's worth understanding because it's how lenders decide whether to say "yes" or "no."
Here's what it means: your housing costs (mortgage, taxes, insurance) shouldn't exceed 28% of your gross monthly income. And your total debt payments (housing plus car loans, credit cards, student loans, everything) shouldn't exceed 36% of your gross monthly income.
Let's make this concrete. Say you make $6,000 per month gross (before taxes). The bank says your housing costs can be up to 28% of that, which is $1,680. And your total debt payments can be up to 36% of that, which is $2,160.
If you already have a $400 car payment and a $150 student loan payment, that's $550 in existing debt. So you can only add $1,610 in new housing costs and stay within the 36% rule ($2,160 - $550).
Most banks will use whichever number is smaller. In this case, $1,610 is smaller than the 28% limit of $1,680, so they'd cap your housing payment at $1,610.
Understanding Your Debt-to-Income Ratio (DTI)
Your debt-to-income ratio is simply: total monthly debt payments ÷ gross monthly income.
If you make $6,000 a month and have $2,000 in debt payments, your DTI is 33%. Most lenders want to see a DTI under 43%, and many prefer under 36%.
Why? Because they've learned from decades of lending that people with higher DTI ratios are more likely to miss payments. When too much of your paycheck goes to debt, you're vulnerable. One emergency—a car repair, medical bill, or job interruption—can sink you.
This is why getting a mortgage isn't just about finding a house you like. It's about proving you have room in your budget to handle it.
Real Numbers Example
Let's build a complete example. Meet Sarah.
Sarah makes $6,000 per month gross income. She has a car payment of $250 and student loans of $150 per month, so her current debt obligations are $400.
She wants to buy a house. Let's see what she can afford:
- Maximum housing cost (28% rule): 28% × $6,000 = $1,680
- Maximum total debt (36% rule): 36% × $6,000 = $2,160
- Available for new mortgage: $2,160 - $400 = $1,760
The limiting factor is the 28% rule: $1,680. That's the maximum her lender will allow for housing.
A $1,680 payment can support about a $340,000 mortgage (depending on interest rates and insurance costs). Sarah has saved $80,000 for a down payment. So her maximum purchase price is around $420,000.
But here's where it gets interesting: Sarah could also afford the $1,760 number if she only counted the 36% rule. But most lenders use the stricter 28% rule for housing, so $1,680 is her realistic cap.
Down Payment and the PMI Monster
Here's something critical: if your down payment is less than 20%, lenders will charge you PMI—private mortgage insurance. PMI is essentially insurance that protects the lender if you stop paying. And guess who pays for it? You do.
PMI typically costs 0.5-1.5% of the loan amount per year. That's an extra $150-$300+ per month on a $300,000 mortgage. It's a real cost, and it disappears once you've paid the principal down to 80% of the home's original value (or after 10-15 years, depending on the loan).
If you put down 20%, you avoid PMI entirely. If you put down 10%, you'll pay PMI. If you put down 5%, you'll pay more PMI.
The Hidden Costs Nobody Mentions
Your mortgage payment is just the start. Here's what else comes out of your paycheck:
Closing Costs: When you buy a house, you'll pay 2-5% of the purchase price in closing costs (appraisal, title insurance, attorney fees, processing). On a $400,000 house, that's $8,000-$20,000. You usually pay this upfront.
Property Taxes: These vary wildly by location but can easily be $2,000-$5,000 per year in many areas. Some people fold this into their mortgage payment; others pay it separately.
Home Insurance: Required by lenders. Usually $1,000-$2,000 per year, sometimes more depending on your home's value and your location.
HOA Fees: If you buy in a development with a homeowner association, you might pay $100-$500+ per month. This is your responsibility, and it comes out of your budget.
Maintenance: This is the invisible cost homeowners discover too late. Plan for 1-2% of your home's value per year for maintenance, repairs, and upgrades. That $400,000 house should see $4,000-$8,000 per year budgeted for maintenance.
Building Your Cash Reserves
Lenders also want to know you have emergency savings. They're looking for what's called "cash reserves"—liquid savings after your down payment and closing costs are paid.
A good rule: try to have 2-6 months of mortgage payments saved up. If your payment is $1,500, that means having $3,000-$9,000 set aside. This shows the lender you can survive a job interruption without defaulting.
Strategic Tips
Don't Max Out What You're Allowed: Just because a lender will give you $1,680 a month in housing costs doesn't mean you should take it. Remember, that calculation assumes you're willing to spend 28% of your gross income on housing. After taxes, that might be 40% of what you actually bring home. Can you live on 60% of your take-home pay for everything else? Maybe, maybe not.
Shop Your Rate: A 0.5% difference in your interest rate can change your payment by $100+ per month. Getting pre-approved by multiple lenders takes a couple hours and could save you thousands.
Avoid New Debt Before Closing: Seriously. If you open a credit card or finance furniture before your mortgage closes, the lender will re-check your credit and might deny you. Don't do it.
References
- Federal Reserve - Consumer Credit Reports
- Consumer Financial Protection Bureau - Mortgage Affordability Guide
- Department of Housing and Urban Development - Home Buying Guide
- National Association of Realtors - Home Affordability Index
This calculator is a starting point for understanding what you might afford, not a guarantee. Lenders use many factors beyond the 28/36 rule—credit score, employment history, savings, loan type. Every situation is different. Speak with a mortgage professional about your specific circumstances before making a decision.