House Affordability

Formula

Max Housing = 28% × Gross Monthly Income

Lenders typically limit housing costs to 28% of gross income and total debt to 36%.

Worked Examples

Example 1: Calculate Maximum Home Price

Problem: Annual income: $100,000, monthly debts: $500, down payment: $50,000, interest rate: 6.5%, property tax: 1.2%, insurance: $1,200/year. What's the maximum affordable home?

Solution: Step 1: Calculate monthly income\n$100,000 ÷ 12 = $8,333/month\n\nStep 2: Apply 28/36 rule\nMax housing (28%): $8,333 × 0.28 = $2,333\nMax total debt (36%): $8,333 × 0.36 = $3,000\n\nStep 3: Account for existing debt\nAvailable for housing: $3,000 - $500 = $2,500\n(Limited by debt ratio, not housing ratio)\n\nStep 4: Subtract insurance\nInsurance: $1,200 ÷ 12 = $100/month\nAvailable for P&I + tax: $2,400\n\nStep 5: Iteratively find max price accounting for property tax\nAt $375,000: taxes = $3,750/year = $312/month\nAvailable for P&I: $2,088\nLoan: $325,000\nPayment at 6.5%: $2,055 ✓\n\nMaximum home price: ~$375,000

Result: Maximum affordable home: $375,000

Example 2: Impact of Existing Debt on Affordability

Problem: Same scenario as above but $1,000 monthly debts instead of $500. How much does this reduce buying power?

Solution: Monthly income: $8,333\nMax total debt (36%): $3,000\nExisting debts: $1,000 (instead of $500)\n\nAvailable for housing: $3,000 - $1,000 = $2,000\nPrevious scenario: $2,500\nReduction: $500/month in housing budget\n\nWith $500/month less:\nMax home price: ~$300,000 (down from $375,000)\n\nConclusion: $500/month in additional debt reduces home affordability by approximately $75,000!\n\nThis demonstrates why paying off debt before house hunting can significantly increase buying power.

Result: $500/month debt = $75,000 less house

Example 3: Higher Income, Lower Down Payment Scenario

Problem: Income: $150,000, debts: $800, down payment: $30,000 (only 10%), rate: 7%, property tax: 1.5%, insurance: $1,800. What can you afford?

Solution: Monthly income: $12,500\nMax housing (28%): $3,500\nMax total debt (36%): $4,500\nAvailable for housing: $4,500 - $800 = $3,700\n\nInsurance: $150/month\nAvailable for P&I + tax: $3,550\n\nWith 7% rate and higher property tax (1.5%):\nAt $450,000 price:\nLoan: $420,000 (90% LTV, will require PMI)\nP&I: $2,795\nTax: $562/month\nPMI estimate: $175/month\nTotal: $3,532 ✓\n\nMaximum: ~$450,000\n\nNote: PMI required due to <20% down payment, adding ~$175/month until 20% equity is reached.

Result: Max: $450,000 (PMI required)

Frequently Asked Questions

How much house can I afford?

Lenders use 28/36 rule: housing ≤28% gross income, total debt ≤36%. But consider your budget—just because you qualify doesn't mean you should max out.

How does interest rate affect affordability?

Significantly. 6% vs 7% on $300K loan = $180/month difference. Over 30 years, that's $64,800. Higher rates reduce affordability.