How Much House Can You Actually Afford?

How Much House Can You Actually Afford?

Most people figure out how much house they can afford by getting pre-approved for a mortgage and buying close to that number. That's the wrong approach. Lenders tell you the maximum they'll lend — not the amount that makes sense for your life.

Here's how to figure out your actual number before you ever talk to a bank.

The Number Lenders Use vs. The Number You Should Use

Lenders use your debt-to-income ratio (DTI) — your total monthly debt payments divided by gross income. Most will approve you up to 43% DTI. Some go higher.

The problem: 43% of gross income going to debt leaves very little room for savings, retirement, emergencies, or anything unexpected. Most financial planners recommend keeping your housing costs — mortgage, taxes, insurance, HOA — at or below 28% of gross income. That's a very different number than what the bank will approve.

If you earn $6,000/month gross, 28% is $1,680/month for all housing costs. At 43%, it's $2,580. The bank will approve you for the higher number. That doesn't mean you should take it.

What Actually Goes Into the Monthly Cost

The mortgage payment is just one part. The real monthly cost of owning a home includes:

  • Principal & interest — the core mortgage payment
  • Property tax — typically 1–2% of home value per year, paid monthly through escrow
  • Homeowner's insurance — usually $100–$200/month
  • PMI — required if you put down less than 20%, typically $50–$200/month
  • HOA fees — if applicable, $50–$500+/month
  • Maintenance — budget 1% of home value per year for repairs and upkeep

On a $400,000 home, that maintenance budget alone is $4,000/year — $333/month that most buyers don't factor in until something breaks.

The Down Payment Question

A larger down payment means a smaller loan, lower monthly payment, and no PMI if you hit 20%. But draining your savings to maximize the down payment is a mistake if it leaves you with no emergency fund.

The right down payment is enough to make the monthly payment manageable, while keeping 3–6 months of expenses in savings. Buying a house and immediately being cash-poor is how small problems become financial crises.

Renting vs. Buying: The Real Comparison

Buying isn't always better than renting. It depends on how long you plan to stay, local market conditions, and what you'd do with the money you're not putting into a down payment.

The break-even point — when buying becomes cheaper than renting — is typically 3–7 years depending on the market. If you're likely to move before then, renting often makes more financial sense even if you can afford to buy.

Factors that favor buying: you plan to stay 5+ years, local prices are reasonable relative to rents, you have a stable income, and you have a solid down payment without depleting your savings.

Factors that favor renting: you might move within 3 years, local prices are high relative to rents, your income is variable, or you're early in building your emergency fund.

Run Both Numbers Before You Decide

The only way to know which makes sense for your situation is to compare the actual costs side by side — what you'd pay to buy versus what you'd pay to rent, factoring in down payment opportunity cost, equity buildup, tax implications, and how long you plan to stay.

Use the MoneyDecoded Rent vs. Buy Calculator to run the comparison for your specific numbers. And if you've already decided to buy, the Mortgage Calculator will show you exactly what different loan amounts and terms cost per month and in total interest.

The Question to Ask Before You Look at Listings

Not "how much will the bank lend me?" Not "what's my monthly payment?" The right question is: what's the maximum home price that keeps my total housing costs below 28% of my gross income, while leaving my emergency fund intact?

That number is almost always lower than your pre-approval. And buying within that number — rather than at the edge of what you're approved for — is the difference between a home that improves your financial life and one that strains it for years.

Compare renting vs. buying for your situation →

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