How Much House Can You Afford?

When a lender says you're approved for a $450,000 mortgage, that's not financial advice — it's a ceiling. The approval amount represents the maximum the bank believes you can technically repay without defaulting. It doesn't account for your retirement savings goals, your desire to travel, your kids' college funds, or the fact that you enjoy eating at restaurants occasionally. The bank's maximum and your comfortable budget are two very different numbers.

Understanding how lenders calculate affordability gives you a framework to set your own budget — ideally one that leaves room for the rest of your life.

The 28/36 Rule

Most conventional lenders use two debt-to-income (DTI) ratios. The front-end ratio (28%) says your total monthly housing cost — mortgage principal, interest, taxes, and insurance (PITI) — shouldn't exceed 28% of your gross monthly income. The back-end ratio (36%) says your total monthly debt payments (housing plus car loans, student loans, credit cards, etc.) shouldn't exceed 36% of gross income.

On a $100,000 household income, the 28% rule caps your monthly housing cost at $2,333. The 36% rule caps total debt payments at $3,000 — so if you have $500 in existing monthly debt, your maximum housing payment drops to $2,500 under the back-end ratio. The lender uses whichever number is lower.

Why 28% Is Already Aggressive

The 28% rule was established decades ago when property taxes were lower, insurance was cheaper, and energy costs were a smaller portion of household budgets. In practice, financial advisors increasingly recommend keeping housing costs at 25% or less of gross income — and some argue for 20% to maintain genuine financial flexibility.

The difference matters more than it sounds. On $100,000 income, 28% housing is $2,333/month. At 20%, it's $1,667. That $666 monthly difference is $8,000 per year — enough to max out an IRA, build an emergency fund, or invest for other goals. Buying at the maximum means every other financial goal competes for whatever's left.

What Gets Counted as Debt

Lenders include minimum monthly payments on credit cards (not the balance — the minimum payment), auto loans, student loans, personal loans, alimony, and child support. They don't typically count utilities, groceries, subscriptions, insurance premiums (other than homeowner's), or other living expenses. This is exactly why bank approval maximums are misleading — they ignore a huge portion of your actual monthly spending.

This also means paying off a car loan before applying for a mortgage can dramatically increase your approval amount. Eliminating a $400 monthly car payment at 36% DTI effectively adds $400 to your allowable housing budget, which translates to roughly $70,000 more in home purchase price depending on rates.