How Much House Can I Really Afford? (Not the Bank's Number)
Why the bank's number is too high
Lenders qualify you using debt-to-income (DTI) ratios. The common guideline is the 28/36 rule: housing costs up to 28% of gross monthly income, and total debt payments up to 36%. Many loan programs stretch well past that — FHA and some conventional loans approve DTIs of 43%, even up to 50% with strong compensating factors.
The problem is what DTI leaves out. It counts your car loan and student loans because they show on a credit report, but it is blind to the biggest parts of a real budget: childcare (which can rival a mortgage payment), retirement contributions, health care, groceries, and the maintenance every homeowner eventually pays. A 45% DTI approval can be technically sound and personally catastrophic.
PITI is the real payment — plus the parts nobody quotes
The monthly figure that matters is PITI: Principal, Interest, Taxes, and Insurance. A rate quote only covers the P and I. The T and I — property taxes and homeowners insurance, usually collected in escrow — can add hundreds a month, and in high-tax states they can rival the loan payment itself.
Then add the parts that never appear on a mortgage statement at all: HOA or condo dues, PMI if you put down less than 20%, and maintenance. Budget roughly 1% of the home's value per year for upkeep — $4,000 on a $400,000 home, or about $333 a month averaged out. Skip these and your "affordable" payment quietly becomes a stretch. To build the whole number correctly, use our real affordability calculator that adds PITI plus life — taxes, insurance, upkeep, and your actual living costs.
A worked example: $110,000 household income
A couple earns $110,000 gross — about $9,167/month. A lender might approve them for a $520,000 home at a ~45% DTI. Watch how the bank's number and the sane number diverge once real life is priced in:
| Line item | Bank's max (~45% DTI) | Sustainable (28% housing) |
|---|---|---|
| Home price | $520,000 | $360,000 |
| Mortgage P&I (7%, 20% down) | $2,767 | $1,916 |
| Property tax + insurance | $780 | $540 |
| Maintenance (1%/yr) | $433 | $300 |
| Total monthly housing | $3,980 | $2,756 |
| As % of gross income | 43% | 30% |
| Left for childcare, retirement, savings, life | tight | comfortable |
Both payments are "affordable" to the lender. Only the right column leaves room to fund a 401(k), cover $1,500/month in childcare, and absorb a surprise $8,000 repair without reaching for a credit card. The $160,000 price gap is the difference between owning a home and being owned by one.
Build your number from cash flow, not the ceiling
Flip the usual process. Instead of asking "what will they approve?", start from your monthly budget:
- Start with take-home pay, not gross. Taxes and 401(k) contributions come out first.
- Subtract everything that is not housing — food, transportation, childcare, insurance, debt payments, and the retirement savings you refuse to skip.
- What is left is your true housing ceiling. Aim to keep it at or below 28% of gross income even though you built it from take-home.
- Back into a price from that PITI-plus number, not from a pre-approval letter.
This approach protects the two things DTI ignores: your retirement and your resilience. A home that crowds out 401(k) contributions for a decade can cost you far more in forgone compounding than the house ever appreciates.
It also builds in room for the costs that arrive after you get the keys. New homeowners routinely underestimate the one-time and recurring expenses that a rental never imposed: higher utility bills on more square footage, lawn care and snow removal, furnishing empty rooms, and the appliances that seem to break in the first year. Leaving a buffer of unspent monthly cash flow — not spending right up to your ceiling — is what turns those surprises into inconveniences instead of emergencies. A house you can afford at 28% but choose to buy at 24% gives you that buffer automatically.
The down payment is the other half of the equation
Affordability is not just the monthly payment — it is also how much cash you bring. A larger down payment lowers your loan, shrinks PITI, and can eliminate PMI once you cross 20% equity. But saving to 20% takes time, and rents and prices may rise while you save. That is a real trade-off: buy sooner with PMI and a smaller cushion, or wait, save more, and buy with a stronger position.
There is no universal right answer — it varies by how fast your market is moving and how quickly you can save. Estimate your down-payment timeline and the rent-longer-vs-buy-now-with-PMI trade-off so you can decide with numbers instead of anxiety. Whatever you choose, keep a separate emergency fund after closing — arriving at your new home with zero cushion is how a normal repair becomes a financial crisis.
Remember that the down payment is not the only cash you need at the table. Closing costs typically run 2% to 5% of the purchase price — lender fees, title insurance, appraisal, and prepaid taxes and insurance — so on a $360,000 home you might need $7,000 to $18,000 on top of the down payment. Add moving costs and immediate repairs, and the true cash-to-close is meaningfully higher than the down-payment figure alone. Budget for the whole number, not just the headline, so you do not empty every account to reach the closing table and then face month one with nothing in reserve.
Frequently asked questions
Why does the bank approve me for more than I can afford?
Lenders qualify you on debt-to-income ratios that only count debts showing on your credit report. They do not see childcare, retirement savings, groceries, or home maintenance, so their approved maximum can be far above the amount that actually keeps your budget healthy. The approval is a repayment ceiling, not a recommendation.
What is the 28/36 rule?
It is a guideline to keep total housing costs at or below 28% of gross monthly income and total debt payments (housing plus car, student loans, and credit cards) at or below 36%. It is a healthier target than the 43%-50% DTI many loans allow, because it leaves room for the expenses lenders ignore.
What does PITI include, and what does it leave out?
PITI is Principal, Interest, Taxes, and Insurance — the four parts most lenders escrow into one payment. It leaves out HOA or condo dues, PMI if you put down under 20%, and maintenance. Budget roughly 1% of the home's value per year for upkeep on top of PITI to get your true monthly cost.
How much should I budget for home maintenance?
A common rule is 1% of the home's value per year, so about $4,000 annually on a $400,000 home, or roughly $333 a month set aside. Older homes and homes in harsh climates can run higher. Treating maintenance as a fixed monthly line item keeps a lumpy $10,000 roof from wrecking your budget.
Should I put down 20% or buy sooner with PMI?
It varies by how fast your market is appreciating and how quickly you can save. Twenty percent down avoids PMI and lowers your payment, but waiting to save it can mean paying higher prices and rent in the meantime. Compare the cost of PMI now against the cost of waiting to decide which leaves you better off.
How much income do I need for a $400,000 house?
Using the 28% housing rule, monthly housing costs on a $400,000 home (PITI plus maintenance) commonly run around $2,900-$3,300, which points to roughly $125,000-$140,000 in gross annual income to stay comfortable. A lender might approve you at a lower income by allowing a higher DTI, but that pushes you toward house-poor.
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