How lenders decide
Lenders work backwards from your debt-to-income ratio. They take your gross monthly income, apply a maximum total DTI (debt-to-income ratio — how a lender measures your monthly bills as a percentage of your monthly income before taxes) — commonly 43% to 50% depending on program and compensating factors — subtract your existing monthly debt payments, and whatever's left is the payment they'll allow.
That payment has to cover principal, interest, property taxes, homeowners insurance, mortgage insurance if applicable, and HOA (homeowners association — a neighborhood or condo group that charges a monthly or yearly fee and sets community rules; lenders count that fee in your payment) dues. Buyers who budget for principal and interest alone routinely overshoot by 25% to 35%.
The 28/36 rule, and why it still works
The classic guideline says your housing payment should stay at or under 28% of gross monthly income, and total debt at or under 36%. Modern programs allow more, but the guideline is a good sanity check because it approximates what people can actually live with rather than what they can technically qualify for.
On $7,000 of gross monthly income, 28% is $1,960 for the full housing payment. That's a very different house than a 50% DTI approval suggests.
Why debt matters more than income
Every $100 of monthly debt payment reduces your buying power by roughly $15,000 to $18,000 at current rates. A $500 car payment is a $75,000-to-$90,000 house.
This is why paying down a card before financing a vehicle is one of the highest-leverage moves a first-time buyer can make. It improves your score and your DTI simultaneously.
Find your life number, not your loan number
Ask a different question than the lender asks: what monthly payment lets you keep saving, keep traveling, and absorb a surprise? For most households, that number is 10% to 20% below the maximum approval.
A useful test: pay yourself the difference for three months. Transfer the proposed payment minus your current rent into savings every month. If it hurts, you found your ceiling before the mortgage did.
The variables that move the answer most
- Interest rate. A one-point change in rate moves affordability roughly 10%.
- Property taxes. Identical homes in adjacent counties can differ by hundreds per month.
- Mortgage insurance. Under 20% down on conventional, PMI (private mortgage insurance — an extra monthly fee on conventional loans when you put down less than 20%; it protects the lender, not you, and can usually be removed later) is score-driven; on FHA (Federal Housing Administration loan — a government-backed loan built for buyers with lower credit scores or smaller down payments) it's structural.
- HOA dues. Fully counted against your DTI, and they only rise.
- Insurance. In high-risk regions this line item has doubled in some markets.
Frequently asked questions
Should I borrow the maximum I'm approved for?
Almost never. Approval math ignores childcare, retirement contributions, and maintenance. Budget to the payment you can carry in a bad month, not a good one.
How much income do I need for a $400,000 house?
It depends far more on your existing debt and local taxes than on the price. With minimal debt, households in the $95k–$115k range often qualify; with a car payment and student loans, the requirement climbs quickly.
Does a bigger down payment increase what I can afford?
Yes, twice over — it lowers the loan amount and can eliminate mortgage insurance, which frees more room inside your DTI cap.
What counts as monthly debt?
Minimum credit card payments, auto loans, student loans, personal loans, child support and alimony, and any co-signed obligation. Utilities, groceries, and insurance premiums other than housing don't count.
Run your numbers
Take what you just learned and apply it to your file.