How Much House Can I Afford?

The 28/36 rule is an easy mortgage affordability rule of thumb. According to the rule, you should spend no more than 28% of your pre-tax income on your mortgage payment and no more than 36% toward total debt obligations. Your mortgage, car payment, credit cards and student loans all count as debt.

Basic mortgage affordability factors include your monthly income, other debt obligations, and credit score. Your lender will compare the money coming in to the money going out and represent this as a figure called the debt-to-income ratio, or DTI. Lenders are looking for borrowers who have stable, reliable income- the kind of people who can make their mortgage payment on time every month.

The last thing a lender wants is to put you in a home that will make you house poor, or worse, put you on the road to foreclosure. Your lender’s goal is to make sure you’re at low risk for default while giving you the purchasing power you need to make a competitive offer on a home you love.

Your lender will consider yearly income, your monthly debts and obligations, your credit, your cash reserves, employment history and more when calculating your maximum loan amount. Getting prequalified feels great -- but it doesn’t mean you should pull the trigger on a home at the top of your budget.

Within your prequalification amount, it’s up to you to decide how much risk you want to assume. If you want to play it safe, stick to the 28/36 rule, and make sure your monthly mortgage payment exceeds no more than 28% of your monthly gross income. As you inch closer to your lending limit, your monthly budget could feel the squeeze after closing, leaving little extra for dining out and other leisure activities. If you do buy a home at the top of your budget, it’s a good idea to consider job security, potential future earnings growth, and cash reserves as compensating factors that can offer extra peace of mind in the long term.

To figure out how much mortgage you can afford, your lender will compare the money coming in to the money going out and represent this as a figure called the debt-to-income ratio, or DTI.

Remember the mortgage rule of thumb-- no more than 36% of your gross monthly income should go toward debts, including a mortgage. And your mortgage shouldn’t be more than 28% of your pre-tax earnings. If you have compensating factors, like excellent credit or large cash reserves, you may be able to swing a higher DTI.