Buying a house is a big deal. And one of the first questions almost everyone asks when they start thinking about buying is:
"How much house can I actually afford?"
It's a fair question. You probably have a rough idea of what you'd like to spend, you've looked at a few houses online, and maybe you've even played around with a mortgage calculator.
But how do you know what you can actually qualify for?
Believe it or not, there's a pretty simple way to get yourself in the ballpark. And you don't need to talk to a lender or fill out a mortgage application to do it.
I'm going to walk you through a basic formula to estimate your purchasing power, and then we'll talk about something I think is even more important: how much you should actually spend.
Because those can be two very different numbers.
Step 1: Figure Out Your Monthly Income
First, take your annual income before taxes and divide it by 12.
This gives you your gross monthly income, which is the starting point lenders use when calculating how much you can qualify for.
Let's say you make $100,000 per year.
$100,000 ÷ 12 = $8,333 per month
Pretty simple, right?
One thing worth mentioning: if you're self employed, work on commission, or receive bonuses, the income a lender can actually use may look a little different. But for someone earning a consistent salary, this is a great starting point.
Step 2: Divide That Number in Half
Now take your monthly income and divide it by two.
$8,333 ÷ 2 = $4,167
Why are we doing this?
Because lenders look at something called your debt to income ratio, or DTI.
It's essentially the percentage of your gross monthly income that goes toward paying your debts, including your future mortgage payment.
Depending on the loan program and your qualifications, some conventional mortgages allow a total debt to income ratio as high as 50%. See Fannie Mae’s DTI guidelines.
That doesn't mean everyone qualifies at 50%, but it's a useful number for estimating the upper end of your potential purchasing power.
For our example, that gives us $4,167 per month to work with.
But we're not done yet.
Step 3: Subtract Your Existing Monthly Debt Payments
Unfortunately, the mortgage isn't the only debt lenders care about.
They're also going to look at your existing monthly obligations, such as:
- Car payments
- Student loans
- Credit card minimum payments
- Personal loans
- Other qualifying monthly debts
Let's say you have a $400 car payment and $200 in credit card minimum payments.
That's $600 per month.
$4,167 − $600 = $3,567
That leaves you with approximately $3,567 per month for your total housing payment under our 50% example.
And when I say total housing payment, I mean more than just principal and interest.
We're talking about the mortgage payment, property taxes, homeowners insurance, and potentially mortgage insurance and HOA dues.
Keep in mind that lenders sometimes calculate qualifying debt payments differently than the amounts you actually pay, particularly with student loans.
Step 4: Turn That Monthly Payment Into a Home Budget
Here's where things get interesting.
You now have a rough estimate of a monthly housing payment, but Zillow doesn't exactly let you search for homes by your personal debt to income ratio.
So how do we turn that payment into a price range?
Here's a quick shortcut.
First, subtract $500 from your monthly housing budget.
We're using that $500 as a starting estimate for property taxes and homeowners insurance. Those expenses vary depending on the home and its location, so this is just a placeholder.
In our example:
$3,567 − $500 = $3,067
That leaves approximately $3,067 for the principal and interest portion of your mortgage payment.
Now comes my favorite little mortgage math trick.
On a 30 year fixed mortgage at an illustrative interest rate of roughly 6.75%, every $10,000 you borrow costs about $65 per month in principal and interest.
So take your remaining payment, divide it by $65, and multiply by $10,000.
($3,067 ÷ $65) × $10,000 = approximately $472,000
That's an estimated mortgage loan amount of $472,000.
Your actual home purchase price could be higher depending on how much money you're putting down. Just remember that mortgage insurance, HOA dues, different tax or insurance costs, and your actual interest rate can change the math.
But now you've got a rough starting point!
Here's the Part I Really Want You to Think About
Just because you can qualify for a mortgage doesn't necessarily mean you should spend that much.
Let's go back to our example.
You make $100,000 per year, have $600 in existing monthly debt payments, and may be able to qualify for a total housing payment around $3,567.
That's great.
But do you actually want to spend that much?
Life has gotten expensive. Groceries, utilities, car insurance, childcare, traveling, saving for retirement, and everything else you enjoy doing all cost money.
And those everyday living expenses generally aren't included in your mortgage debt to income calculation.
The last thing I want is for someone to buy a house they love but feel like they can't afford to do anything outside of it.
You should be able to enjoy your home and still have a life.
My Personal Rule of Thumb: Aim for 40%
If you're trying to figure out a more comfortable budget, I'd start by looking at around 40% of your gross monthly income for all your monthly debt payments combined.
That's your mortgage, car loans, student loans, credit cards, and other debt payments.
It's not a rigid rule. Everyone's financial situation is different. But I think it's a reasonable place to start if you want to avoid stretching yourself too thin.
Let's use our same $100,000 income example.
Instead of dividing our monthly income in half, we're going to multiply it by 40%.
$8,333 × 40% = $3,333
Now subtract the same $600 in monthly debt payments.
$3,333 − $600 = $2,733
That leaves roughly $2,733 per month for housing.
Subtract our estimated $500 for taxes and insurance:
$2,733 − $500 = $2,233
Using our same $65 shortcut:
($2,233 ÷ $65) × $10,000 = approximately $344,000
Now we're looking at an estimated mortgage loan amount around $344,000, before adjusting for mortgage insurance, HOA dues, and other property specific costs.
That's a pretty significant difference from the maximum qualification example.
But here's something else I want to make clear.
Maxing out your mortgage preapproval isn't always a bad thing.
I don't think there's anything inherently wrong with buying at the top of your approved budget, as long as you have a good grasp of your finances.
If you understand your monthly expenses, have adequate savings, know what your financial goals look like, and you're comfortable with the payment, then spending closer to your maximum approval amount might make perfect sense.
Someone making $200,000 per year with very little debt and substantial savings may have a completely different comfort level than someone earning $75,000 with car payments, childcare expenses, and other financial responsibilities.
That's why I don't believe there's one perfect debt to income ratio for everyone.
The 40% number is simply a starting point. From there, it's about figuring out what works for you.
A Few Things to Remember Before You Start House Shopping
This formula is meant to give you a ballpark estimate. It isn't a substitute for an actual mortgage preapproval.
Your real purchasing power can change based on your credit profile, interest rate, down payment, loan program, qualifying income, property taxes, homeowners insurance, mortgage insurance, and HOA dues.
And there's another piece we haven't discussed: the money you need upfront.
Your down payment and closing costs are separate from the monthly affordability calculation. You can have enough income to qualify for a mortgage and still need a plan for the cash required to close.
The reverse is true, too. Having a large down payment doesn't automatically mean a higher monthly payment makes sense for your budget.
Final Thoughts
Buying a house is exciting. It's also probably one of the biggest financial decisions you'll ever make.
My goal as a mortgage broker isn't just to tell you the most expensive house you can qualify for.
It's to help you understand your options, what those options actually cost, and how a mortgage fits into the rest of your life.
Maybe that means buying at the top of your preapproval. Maybe it means buying well below it so you have extra money every month for the things you enjoy.
Neither option is necessarily right or wrong.
What matters is understanding your finances and making an informed decision about what you're comfortable spending.
Remember, qualifying for a mortgage and comfortably affording a mortgage are two different things.
If you're thinking about buying a house in Arizona and want to know what the numbers look like for your situation, I'd be happy to walk through them with you.
No pressure, no guessing. Just a conversation about what makes sense for you.
Keep learning: Download my free homebuyer guides or read when to lock your mortgage rate.
Considering a temporary payment reduction? Try the 2-1 buydown calculator to compare the early payments with the full payment you need to budget for.