What Lenders Approve vs. What You Can Afford
Mortgage lenders will typically approve you for a payment that represents up to 43–45% of your gross monthly income (back-end DTI). This is the maximum they will lend — not the financially comfortable amount.
A 43% DTI means 43 cents of every pre-tax dollar you earn goes to debt payments. After taxes plus living expenses, many borrowers at maximum DTI have very little financial flexibility.
The 28/36 rule is more conservative — and more financially sound.
The 28/36 Rule
| Ratio | What It Measures | Target |
|---|---|---|
| Front-end (28%) | Housing costs ÷ gross income | Below 28% |
| Back-end (36%) | All debt payments ÷ gross income | Below 36% |
Housing costs include: mortgage principal + interest + property taxes + homeowner’s insurance + PMI (if applicable) + HOA fees
All debt includes: housing + car loans + student loans + credit card minimums + any other debt
What You Can Afford by Income
Estimated home price range based on gross income (28/36 rule, 20% down, 6.75% rate, 30-year):
| Gross Annual Income | Monthly PITI Cap (28%) | Approximate Home Price |
|---|---|---|
| $60,000 | $1,400/mo | ~$175,000–$200,000 |
| $80,000 | $1,867/mo | ~$230,000–$260,000 |
| $100,000 | $2,333/mo | ~$290,000–$325,000 |
| $125,000 | $2,917/mo | ~$360,000–$410,000 |
| $150,000 | $3,500/mo | ~$435,000–$490,000 |
| $200,000 | $4,667/mo | ~$580,000–$650,000 |
PITI = Principal, Interest, Taxes, Insurance. Estimates vary by local tax rates, insurance costs, and actual interest rates available.
The Cash Flow Test
The percentage rules give you an approximation. The cash flow test gives you reality.
Step 1: Calculate your estimated monthly housing cost (use a mortgage calculator for P&I + estimate taxes and insurance).
Step 2: Add all other monthly debt payments.
Step 3: Subtract from your net (take-home) monthly income — not gross.
Step 4: With the remaining balance, can you afford:
- Regular monthly expenses (food, transportation, utilities, etc.)?
- 15% of gross income toward retirement savings?
- Home maintenance budget (~1% of home value per year, saved monthly)?
- Emergency fund that is not depleted at closing?
If the answer to any of these is no, the home may be affordable on paper but not financially comfortable in practice.
The Costs Buyers Often Underestimate
Closing Costs
Closing costs typically run 2–3% of the loan amount. On a $350,000 purchase, that is $7,000–$10,500 in upfront costs above the down payment. Many first-time buyers do not fully account for this.
Property Taxes
Property taxes range from 0.3% of assessed value (Hawaii) to 2%+ (New Jersey, Illinois). On a $350,000 home, taxes range from roughly $1,050 to $7,000+ per year — a significant variable in monthly housing cost.
Home Maintenance
A common rule of thumb: budget 1% of home value per year for maintenance and repairs. On a $300,000 home, that is $3,000/year ($250/month). First-year costs are often higher as new owners discover deferred maintenance.
HOA Fees
In condo and planned community purchases, HOA fees are mandatory and can run $200–$800+/month. These directly affect affordability and must be included in the front-end DTI calculation.
How to Avoid Being House Poor
- Buy below your maximum: Lender approval is not the same as your personal affordability ceiling
- Keep a cash buffer at closing: Do not drain your emergency fund for the down payment
- Account for rate increases (if considering ARM): What is your payment if rates rise 2%?
- Model one income: If you are a two-income household, can you carry the mortgage on one income if needed?
Related: Is It Better to Rent or Buy? · Should I Put 20% Down? · Is My Debt-to-Income Ratio Too High?