Start with your gross monthly income, not what feels comfortable

The most useful starting point is the debt-to-income ratio — the percentage of your gross monthly income that goes to all debt payments, including the new mortgage. Most lenders will not approve you if this ratio exceeds 43%, though some will go to 50% if you have strong credit and savings. This is a hard ceiling, not a target.

To find your maximum approved payment, multiply your gross monthly income by 0.43. That number is the total you can owe across all debts — car loans, student loans, credit cards, and the new mortgage payment combined. Subtract what you already pay each month on existing debts. The remainder is what lenders will allow for your house payment, property taxes, homeowners insurance, and mortgage insurance if required.

Example: If you earn $5,000 gross per month and already pay $400 on a car loan, your maximum total debt is $2,150. Subtract the $400 car payment, and you have $1,750 available for housing. That $1,750 must cover the mortgage principal and interest, property taxes, insurance, and any mortgage insurance — not just the mortgage payment alone.

Key Takeaways

  • Lenders typically cap your total debt payments at 43% of gross monthly income, which includes your new mortgage plus all existing debts.
  • Your housing payment covers more than just the mortgage: property taxes, homeowners insurance, and mortgage insurance all count toward your debt-to-income ratio.
  • The price you can afford to pay for a house depends on your down payment size, local property tax rates, and your credit score — the same income supports different purchase prices in different places.
  • A payment you can technically afford is not the same as a payment you can comfortably make if your income drops or unexpected costs arise.
  • Your lender's maximum approval is a ceiling, not a recommendation for how much to actually borrow.

How property taxes and insurance shrink your actual mortgage payment

The monthly housing payment that counts toward your debt-to-income ratio includes four separate costs: principal and interest on the mortgage, property taxes, homeowners insurance, and mortgage insurance (if your down payment is less than 20%). Most people focus only on the mortgage payment itself and get surprised when the actual bill arrives.

Property taxes vary dramatically by location — from less than 0.5% of home value annually in some states to over 2% in others. A $300,000 house in a high-tax area can carry $500 to $600 per month in property taxes alone. Homeowners insurance typically runs $100 to $200 per month depending on the home's age, location, and your coverage choices. Mortgage insurance (PMI) adds another $150 to $300 per month if you put down less than 20%.

If your lender approves you for a $1,750 housing payment and your area's property taxes are $400 per month plus $150 for insurance plus $200 for mortgage insurance, you have only $1,000 left for the actual mortgage payment. That $1,000 payment on a 30-year loan at current rates supports a loan amount around $165,000 to $180,000 — not the $300,000+ house price many people expect.

Down payment size changes what you can afford

A larger down payment reduces both the loan amount and the monthly mortgage insurance, which frees up room in your debt-to-income ratio for a bigger mortgage payment. The difference is substantial: putting 20% down eliminates PMI entirely, while 10% down adds roughly $200 to $300 per month in insurance costs on a $300,000 loan.

Down payment also affects the interest rate your lender offers. Borrowers with 20% down typically receive better rates than those with 5% down, sometimes by 0.25% to 0.5%. Over a 30-year loan, that difference can mean $50 to $100 per month in additional interest costs. Conversely, if you have limited savings, a smaller down payment lets you buy sooner, but it increases your monthly payment and reduces the price range you can afford.

The trade-off is real: you can either save for a larger down payment and buy a more expensive house with a lower monthly payment, or buy sooner with a smaller down payment and accept a lower purchase price or higher monthly costs. There is no universal right answer — it depends on your timeline, how much you have saved, and whether you expect your income to rise.

Credit score affects the interest rate you receive

Lenders charge higher interest rates to borrowers with lower credit scores because the risk of default is higher. The difference between a 620 credit score and a 760 score can be 0.75% to 1.5% in interest rate, which translates to $100 to $200 per month on a $300,000 loan. That higher payment counts against your debt-to-income ratio, so a lower credit score reduces the price range you can afford.

If your credit score is below 640, many conventional lenders will not work with you at all, or will require a larger down payment (25% or more). FHA loans are available with credit scores as low as 580, but they require mortgage insurance for the life of the loan, which increases your monthly payment. Improving your credit score before applying for a mortgage — by paying down credit card balances or correcting errors on your credit report — can save you tens of thousands of dollars over the life of the loan.

The difference between what you can afford and what you should borrow

Your lender's maximum approval is based on your current income and debts, not on what happens if you lose your job, face a medical emergency, or your income drops. Many homeowners who borrowed at the maximum approved amount discovered during the 2008 recession and again during the pandemic that they could not sustain the payment when circumstances changed.

A practical rule many financial advisors suggest is to aim for a housing payment no higher than 28% of gross monthly income — not the 43% lenders allow. Using the earlier example of $5,000 gross income, that would be a $1,400 housing payment instead of $1,750. The extra $350 per month provides a buffer if your income drops, your property taxes increase, or insurance rates rise. It also leaves room in your budget for maintenance, repairs, and the other costs of homeownership that renters do not face.

The house you can afford to buy is not the same as the house you can afford to keep. Before committing to a payment at your lender's maximum, ask yourself: Could I make this payment if I lost my job and found new work at 80% of my current salary? Could I handle it if my property taxes increased 20% or my insurance doubled? If the answer is no, the house is too expensive, regardless of what the lender approves.

How to calculate your actual maximum payment

Start by gathering three numbers: your gross monthly income, your existing monthly debt payments (car loans, student loans, credit cards, child support), and your credit score. Multiply your gross income by 0.43 to find your maximum total debt. Subtract your existing debts. The remainder is your housing budget.

Next, research property taxes and insurance in the specific area where you want to buy. Contact a local insurance agent for a homeowners insurance quote on a house similar to what you are considering. Look up the property tax rate for the county or municipality — it is public information, usually available on the assessor's website. Add those two numbers together and multiply by 12 to get the annual cost, then divide by 12 again to get the monthly cost.

If your down payment will be less than 20%, add an estimate for mortgage insurance. Most lenders can tell you the PMI cost based on your loan amount and down payment percentage. Subtract property taxes, insurance, and PMI from your housing budget. The remainder is what you can afford to pay toward principal and interest on the mortgage itself.

Use an online mortgage calculator to see what loan amount that payment supports at current interest rates. Add your down payment to that loan amount to find the maximum house price you can afford. This number is almost always lower than what people initially expect, which is why doing the math before house hunting matters.

Frequently Asked Questions

What if my income varies month to month?

Lenders typically average your income over the past two years if you are self-employed or work on commission. They use the lower of your average or your most recent year's income to be conservative. If your income has been rising, expect the lender to use a lower number than you might hope. Document your income with tax returns, profit-and-loss statements, or bank deposits — lenders will verify everything.

Does my spouse's income count if we are not married?

No. Only income from people whose names will be on the mortgage counts toward your debt-to-income ratio. If you are married or in a civil partnership, both spouses' incomes count. If you are unmarried, only your income counts, even if your partner contributes to the household. Some lenders allow a co-signer, but that person's debts also count against the ratio.

Can I get approved for more if I pay off my car loan first?

Yes. Paying off existing debts reduces your total monthly obligations, which lowers your debt-to-income ratio and frees up room for a larger mortgage payment. If you have $400 in car payments and can pay off that loan before applying for a mortgage, you increase your available housing budget by $400 per month. The timing matters: pay it off, let the account close, and then apply for the mortgage so the lender sees the lower debt load.

What if I want to borrow less than the maximum?

That is a smart choice. Borrowing less than your maximum approval gives you financial breathing room and means lower monthly payments. You will still need to meet the lender's minimum requirements — usually a down payment of at least 3% to 5% and a debt-to-income ratio below 43% — but staying well below the maximum is a safer financial position.

Do student loans count differently than other debts?

Student loans count the same as any other debt in your debt-to-income ratio. However, if your loans are in deferment or forbearance (paused payments), some lenders will not count them. If you are on an income-driven repayment plan, the lender uses your actual monthly payment, not the standard 10-year payment amount. Ask your lender how they will treat your specific student loan situation before you apply.