How Much House Can I Afford? The Math Lenders Actually Use

Start with the payment, not the price

A $500,000 house does not have one payment. The same price can be a very different monthly number depending on the down payment, the loan program, the property taxes in that county, the insurance market, and whether there is an HOA. Lenders think in PITI — principal, interest, taxes, insurance — plus HOA dues and mortgage insurance where they apply. So should you.

The two ratios

Front-end ratio — the full house payment as a share of your gross (pre-tax) monthly income. The old rule of thumb is 28%.

Back-end ratio (DTI) — the house payment plus every other monthly debt on your credit report (car loans, student loans, minimum card payments, child support) as a share of gross income. This is the number lenders actually enforce. Many conventional programs go into the mid-40s; FHA can stretch further with compensating factors like reserves or a large down payment.

What does not count as debt: utilities, phone bills, groceries, insurance you pay outside the mortgage, or subscriptions. What does count: anything with a monthly obligation on your credit report — even a $40 store card minimum.

Income: what lenders count

• W-2 salary — straightforward; two years in the field is the norm.
• Hourly, overtime, bonus, commission — usually a two-year average, and lenders want to see it is likely to continue.
• Self-employment — typically a two-year average of net income from tax returns, with add-backs for depreciation. Bank-statement and DSCR programs exist when returns understate your cash flow.
• Rental income — a percentage of documented rent (to allow for vacancy), and on a new 2–4 unit purchase, the appraiser's rent schedule.
• Retirement, Social Security, disability — count, often with a gross-up if non-taxable.

A worked example (illustration only)

Gross income $9,000 a month. Existing debts: $450 car payment, $200 student loans, $120 card minimums = $770.

At a 43% back-end ratio, total allowable monthly debt is $3,870. Subtract $770 and the house payment can be up to about $3,100 including taxes, insurance, and any HOA. Whether that buys a $400,000 house or a $480,000 house depends on the rate you lock, your down payment, and the local tax bill — which is exactly what the lender's quote pins down.

Beyond the ratio: the other gates

1. Down payment and reserves — the money has to be documented (bank statements, gift letters) and some programs want months of payments left in the bank.
2. Credit — the score sets pricing and, on some programs, the DTI ceiling.
3. The property — the appraisal must support the price; condos and multi-units carry extra review.

The honest move

Before you shop, let a lender tell you your real number with your actual credit and income — a pre-approval. You will negotiate better knowing the ceiling instead of guessing at it.