How Much Mortgage Can I Afford?

There are a number of factors to consider

Reviewed by Caitlin Clarke
Fact checked by Katrina Munichiello

If you’re looking to buy a home, it’s important to understand how much you can afford to pay. A general guideline for the mortgage you can afford is 200% to 250% of your gross annual income. However, the specific amount you can afford to borrow depends on several factors, not just what a mortgage lender is willing to lend you. You need to evaluate your finances, preferences, and priorities. Here is everything you need to consider to determine how much you can afford.

Key Takeaways

• The general rule is that you can afford a mortgage that is 2x to 3x your gross income.
• Total monthly mortgage payments are typically made up of four components: principal, interest, taxes, and insurance.
• Your front-end ratio is the percentage of your annual gross income that goes toward paying your mortgage, and in general, it should not exceed 28%.
• Your back-end ratio is the percentage of your annual gross income that goes toward paying your debts, and in general, it should not exceed 43.

How Much of a Mortgage Can I Afford?

Most prospective homeowners can generally afford to finance a property whose mortgage is between two and three times their annual gross income. Under this formula, a person earning $100,000 per year can only afford a mortgage of $200,000 to $250,000. However, this calculation is only a general guideline.

Ultimately, when deciding on a property, you need to consider several additional factors. First, it’s a good idea to understand what your lender thinks you can afford and how it arrives at that estimate.

Second, you need to have some personal introspection and figure out what type of home you are willing to live in if you plan on living in the house for a long time and what other types of consumption you are ready to forgo—or not—to live in your home.

Important

While real estate has traditionally been considered a safe long-term investment, recessions and other disasters (like the 2020 economic crisis) can test that theory—and make would-be homeowners think twice.

How Do Lenders Determine Mortgage Loan Amounts?

While each mortgage lender maintains its own criteria for affordability, your ability to purchase a home (and the size and terms of the loan you will be offered) always depends mainly on the following factors.

Many factors go into the mortgage lender’s decision on homebuyer affordability, but they boil down to income, debt, assets, and liabilities. A lender wants to know how much income an applicant makes, how many demands there are on that income, and the potential for both in the future—in short, anything that could jeopardize its ability to get paid back.

Your income, down payment, and monthly expenses are generally base qualifiers for financing, while your credit history and score determine the rate of interest on the financing itself.

Gross Income 

This is the level of income a prospective homebuyer makes before taking out taxes and other obligations. This is generally deemed your base salary plus any bonus income and can include part-time earnings, self-employment earnings, Social Security benefits, disability, alimony, and child support.

Front-End Ratio

Gross income plays a vital part in determining the front-end ratio, also known as the mortgage-to-income ratio. This ratio is the percentage of your yearly gross income that can be dedicated toward paying your mortgage each month. The total that makes up your monthly mortgage payment consists of four components, known as principal, interest, taxes, and insurance (PITI). If required by your mortgage, the insurance portion includes property insurance and private mortgage insurance (PMI).

A good rule of thumb is that the front-end ratio based on PITI should not exceed 28% of your gross income. However, many lenders let borrowers exceed 30%, and some even let borrowers exceed 40%.

Back-End Ratio

Also known as the debt-to-income ratio (DTI), it calculates the percentage of your gross income required to cover your debts. Debts include credit card payments, child support, and other outstanding loans, such as your car loan and student loan.

In other words, if you pay $2,000 each month in debt services and you make $4,000 each month, your ratio is 50%—half of your monthly income is used to pay the debt.

However, a 50% DTI ratio isn’t going to get you that dream home. Most lenders recommend that your DTI not exceed 43% of your gross income. To calculate your maximum monthly debt based on this ratio, multiply your gross income by 0.43 and divide by 12.

Your Credit Score

If one side of the affordability coin is income, then the other side is your debt. Mortgage lenders have a formula to determine the level of risk of a prospective home buyer. The formula varies but is generally determined by using the applicant’s credit score.

Applicants with a low credit score can expect to pay a higher interest rate, also referred to as an annual percentage rate (APR), on their loan. If you want to buy a home soon, pay attention to your credit reports.

Be sure to keep a close eye on your reports. If there are inaccurate entries, it will take time to get them removed, and you don’t want to miss out on that dream home because of something that is not your fault.

The 28%/36% Rule

The 28%/36% rule is a heuristic used to calculate the amount of housing debt one should assume. According to this rule, a maximum of 28% of one’s gross monthly income should be spent on housing expenses and no more than 36% on total debt service (including housing and other debt such as car loans and credit cards). Lenders often use this rule to assess whether to extend credit to borrowers. Sometimes the rule is amended to use slightly different amounts, such as 29%/41%.

How to Calculate a Down Payment Amount

The down payment is the amount that the buyer can afford to pay out-of-pocket for the residence, using cash or liquid assets. Lenders typically demand a down payment of at least 20% of a home’s purchase price, but many let buyers purchase a home with significantly smaller percentages. Obviously, the more you can put down, the less financing you’ll need, and the better you look to the bank.

For example, if a prospective homebuyer can afford to pay 10% on a $100,000 home, the down payment is $10,000, which means the homeowner must finance $90,000.

Besides the amount of financing, lenders also want to know the number of years for which the mortgage loan is needed. A short-term mortgage has higher monthly payments but is likely less expensive over the duration of the loan.

Homebuyers need to come up with a 20% down payment to avoid paying private mortgage insurance.

Personal Considerations for Homebuyers

A lender may say that you can afford a considerable estate, but can you? Remember, the lender looks primarily at your gross pay and other debts. The problem with using gross income is simple: You factor in as much as 30% of your paycheck—but what about taxes, FICA deductions, and health insurance premiums? Also consider your pre-tax retirement contributions and college savings, if you have children. Even if you get a refund on your tax return, that doesn’t help you now—and how much will you get back?

That’s why some financial experts feel it’s more realistic to think in terms of your net income and that you shouldn’t use any more than 25% of your net income on your mortgage payment. Otherwise, while you might be able to pay the mortgage monthly, you could end up house-poor.

The costs of paying for and maintaining your home could take up such a large percentage of your income—far and above the nominal front-end ratio—that you won’t have enough money left to cover other discretionary expenses or outstanding debts or to save for retirement or even a rainy day. Whether you should be house-poor or not is mostly a matter of personal choice; getting approved for a mortgage doesn’t mean you can afford the payments.

Pre-Mortgage Considerations

In addition to the lender’s criteria, consider the following issues when contemplating your ability to pay a mortgage:

1. Income

Are you relying on two incomes to pay the bills? Is your job stable? Can you easily find another position that pays the same, or better, wages if you lose your current job? If meeting your monthly budget depends on every dime you earn, even a small reduction can be a disaster.

2. Expenses

The calculation of your back-end ratio will include most of your current debt expenses, but you should consider future costs like college for your kids (if you have them) or your hobbies when you retire.

3. Lifestyle

Are you willing to change your lifestyle to get the house you want? If fewer trips to the mall and a little tightening of the budget don’t bother you, applying a higher back-end ratio might work out fine. If you can’t make any adjustments or already have multiple credit card account balances—you might want to play it safe and take a more conservative approach in your house hunting.

Personality. No two people have the same personality, regardless of their income. Some people can sleep soundly at night knowing that they owe $5,000 per month for the next 30 years, while others fret over a payment half that size. The prospect of refinancing the house to afford payments on a new car would drive some people crazy while not worrying others at all.

Costs Beyond the Mortgage

While the mortgage is undoubtedly the most considerable financial responsibility of homeownership, there are many additional expenses, some of which don’t go away even after the mortgage is paid off. Smart shoppers would do well to keep the following items in mind:

• Property Taxes: Understanding how much you owe is an important part of your budget. The city, township, or county establishes your property tax based on your home, lot size, and other criteria, including local real estate conditions and the market. The amount varies by state, and some states boast lower property taxes than others. For example, New Jersey’s was an average of 2.08% in 2024, but Alabama’s was 0.36%. You will always have to account for paying property tax, even when your mortgage is paid off in full.
• Home Insurance: Every homeowner needs home insurance to protect their property and possessions against natural and human-made disasters, like tornados or theft. If you buy a home, you will need to price out the appropriate insurance for your situation. Most mortgage companies won’t let you purchase a home without coverage for the purchase price. You may need to show proof of home insurance to be approved by your mortgage lender.
• Maintenance: Even if you build a new home, it won’t stay new forever, nor will those expensive appliances. The same applies to the home’s roof, furnace, driveway, carpet, and even the paint. If you are house-poor when you take on that first mortgage payment, you could find yourself in a difficult situation if your finances haven’t improved by the time your home requires significant repairs.
• Utilities: Heat, insurance, electricity, water, sewage, trash removal, cable television, and telephone services cost money. These expenses are not included in the front-end ratio and they aren’t calculated in the back-end ratio. Nevertheless, they are unavoidable for most homeowners. Consider that a bigger house means higher utility bills due to heating and cooling energy needs to condition the bigger space. Many people overlook that when they see a big charming home.
• Association Fees: Many condominiums and coops and specific gated neighborhoods or planned communities assess association fees. They can be less than $100 per year while others are several hundred dollars per month. Some communities include lawn maintenance, snow removal, a community pool, and other services. Some fees are only used for administration costs. It’s important to remember that while an increasing number of lenders include association fees in the front-end ratio, these fees are likely to increase over time.
• Furniture and Decor: Before you buy a new house, take a good look at the number of rooms that will need to be furnished and the number of windows that will require covering.

Tips for Buying a Home

To help ensure that you can afford your home and maintain it over time, there are some smart measures you can take. First, save up a cash reserve that exceeds your down payment and keep it tucked away in case you lose your job or can’t earn income. Having several months of mortgage payments in emergency savings lets you keep the house while you look for new work.

You should also look for ways to save on your mortgage payments. While a 15-year mortgage will cost you less over the loan’s life, a 30-year mortgage will feature lower monthly payments, which may make it easier to afford month-to-month. Certain loan programs offer reduced or zero down payment options such as VA loans for veterans or USDA loans for rural properties.

Finally, don’t buy a bigger house than you can afford. Do you need that extra room or the finished basement? Does it need to be in this particular neighborhood? If you are willing to compromise a bit on things like this, you can often score lower home prices.

How Much of a Mortgage Can I Afford Based on My Salary?

The amount of a mortgage you can afford based on your salary often comes down to a rule of thumb. For example, some experts say you should spend no more than 2x to 2.5x your gross annual income on a mortgage (so if you earn $60,000 per year, the mortgage size should be at most $150,000). Other rules suggest you shouldn’t spend more than 28-29% of your gross income per month on housing.

What Does It Mean to Be House Poor?

House poor is a situation where most of your wealth is tied up in your house and much of your income goes toward servicing the mortgage debt and related expenses. An example would be if you had $100,000 in savings and used all of it to finance a $500,000 property with a $2,500 monthly mortgage payment when your net income is $3,000 per month.

Such a situation can give the illusion of economic prosperity but quickly unravel to foreclosure if things turn sour.

How Much Debt Can I Already Have and Still Get a Mortgage?

The amount of debt you can have will depend on your income, and in particular your debt-to-income (DTI) ratio. Generally having a DTI of 30% or less is the rule of thumb going into the mortgage application process, and with the mortgage it shouldn’t then exceed 43% on the back end.

The Bottom Line

The cost of a home is the single largest personal expense most people will ever face. Before taking on such an enormous debt, take the time to do the math. After you run the numbers, consider your situation and think about your lifestyle—not just now but into the next decade or two.

Before you purchase your new home, consider not only what it costs you to buy it but how your future mortgage payments will impact your life and budget. Then, get loan estimates for the type of home you hope to buy from several different lenders to get real-world information on the kinds of deals you can get.

Warning

Mortgage lending discrimination is illegal. If you think you’ve been discriminated against based on race, religion, sex, marital status, use of public assistance, national origin, disability, or age, there are steps you can take. One such step is to file a report to the Consumer Financial Protection Bureau (CFPB) or with the U.S. Department of Housing and Urban Development (HUD).