How much house can I afford? Start with what the lender doesn't ask.

Most people first learn what they can afford from a lender, and the number arrives with an air of authority. It has been run through software; it carries a bank's letterhead; it feels like a verdict. It is better understood as an upper bound. A preapproval tells you the largest loan a lender is willing to make given its own rules about risk. It does not know what you pay for day care, whether your income is steady, or how much you would like to have left at the end of the month.

This guide works through the question in the order that keeps it honest: first the lender's arithmetic, because it sets the ceiling; then the costs that arithmetic leaves out; then a worked example; and last the cash you need on closing day, which catches more first-time buyers than the monthly payment does. The home affordability calculator runs the same math on your own numbers.

How lenders measure affordability

Lenders lean on one ratio above all: debt-to-income, or DTI. Add up your monthly housing payment (principal, interest, property tax, homeowners insurance, mortgage insurance and any HOA dues) and your other monthly debt payments, then divide by gross monthly income, meaning income before taxes. Some guidelines also look at the housing payment alone, the so-called front-end ratio.

The limits vary by loan program, and they are published. Fannie Mae, which buys a large share of conventional mortgages, caps total DTI at 36% of stable monthly income on manually underwritten loans, allows up to 45% when the borrower meets its credit score and reserve requirements, and accepts up to 50% on loans run through its automated system, Desktop Underwriter (Selling Guide B3-6-02, April 2025). For FHA loans that are underwritten by hand, HUD sets 31% for housing and 43% in total, rising as high as 40% and 50% when the borrower has compensating factors such as substantial cash reserves (Mortgagee Letter 2014-02).

One number you will still see quoted is out of date. For years a "qualified mortgage" could not exceed a 43% debt-to-income ratio. The Consumer Financial Protection Bureau removed that cap in a rule finalized in December 2020 and replaced it with a test based on price: broadly, a loan qualifies if its APR is within 2.25 percentage points of the average prime offer rate for a comparable loan. Lenders have had to use the new definition since October 1, 2022 (CFPB). They must still consider your debt-to-income ratio or residual income. They just no longer have to stop at 43%.

What the formula doesn't see

The debt-to-income ratio counts debts, and it defines them narrowly. Fannie Mae's list of monthly obligations includes installment loans such as car and student loans, minimum payments on revolving accounts, lease payments, alimony and child support, and other recurring obligations of that kind. Day care is not on it. Neither are groceries, utilities, commuting, health insurance premiums deducted from a paycheck, or the money you send to a parent. Two families with the same income and the same car loan can be approved for the same mortgage when one of them spends $1,500 a month on childcare and the other spends nothing.

The ratio also runs on gross income, before federal and state income tax, Social Security and Medicare, and any retirement contributions. A household that sets aside 10% for retirement through payroll sees that money leave before it reaches the checking account, but the lender's ratio treats it as available for the mortgage. That suits a lender estimating default risk across many borrowers. It is a poor guide to one household's budget.

The 28/36 rule, and a stricter version

The oldest rule of thumb in mortgage lending says housing should take no more than 28% of gross monthly income and all debt payments, housing included, no more than 36%. The 36% line survives in Fannie Mae's manual underwriting limit, and the rule is a reasonable starting point. It shares the lender's blind spot, though: it counts debts and nothing else.

The budget answer in our calculator makes one change. It keeps the 28% cap on housing, and it counts your other fixed costs, the ones you cannot skip in a lean month, against the 36% line alongside your debts. Childcare is the obvious case; tuition and regular support for a relative are others. The result is stricter than the lender's ceiling by design, and it is not a law of finance. It is a line we think is worth drawing, and the calculator shows you all three answers so you can see exactly what it costs you.

A worked example: one household, three answers

Take a household earning $100,000 a year before tax, or $8,333 a month. They pay $600 a month toward a car loan and student loans, and $500 a month for after-school care. They have $40,000 saved for a down payment, separate from their emergency fund. They are looking at a 30-year fixed loan at 7.32%, Freddie Mac's national average for the week of October 22, 2026. The property tax rate is 0.9% of the home's value a year, close to the national average of 0.89% in NAHB's analysis of 2024 Census data, and insurance is $1,500 a year. Below 20% down, we assume private mortgage insurance at the same illustrative rates our mortgage calculator uses.

1. The lender's ceiling: about $403,000. At a 45% total debt-to-income ratio, housing can take $3,750 minus the $600 of debts, or $3,150 a month. That buys a home of about $403,000 with a $363,000 loan, less than 10% down, and a payment of about $3,148 including $227 of mortgage insurance. Through automated underwriting at 50%, the ceiling rises to about $453,000.
2. The 28/36 rule: about $309,000. Housing is capped at 28% of income, $2,333 a month. (The 36% total limit would allow $2,400 after debts, so the 28% cap is the one that binds.) That supports a home of about $309,000 and a monthly cost of $2,328.
3. The budget answer: about $256,000. Counting the $500 of childcare with the debts, the 36% line leaves $3,000 minus $1,100, or $1,900 a month for housing. That supports a home of about $256,000: $1,484 of principal and interest on a $216,000 loan, $192 of property tax, $125 of insurance and $99 of mortgage insurance.

The spread between the first and last answers is $147,000 of house and $1,250 a month. That $1,250 is the whole question. At the budget price it stays with the household, available for retirement contributions, a car repair, a gap between jobs. At the ceiling price it goes to the house every month for as long as they own it, with the childcare bill still due.

None of these is the "right" answer. A household expecting childcare to end in three years, or a raise it can count on, might reasonably choose something between the budget and the 28/36 figure. A household with one earner in a volatile industry might want to stay below the budget line. The point of seeing all three is that the choice becomes deliberate.

The rate will move

Rates change weekly, and a house hunt can take months. If the rate in the example rose one point, to 8.32%, the same budget limits would support about $238,000 instead of $256,000, and the lender's ceiling would fall from about $403,000 to $381,000. Choosing a 15-year loan has a similar effect for a different reason: at Freddie Mac's 15-year average of 6.68%, the faster repayment leaves room for about $214,000 within the budget answer, though the loan would cost far less interest over its life.

One response is to settle on a monthly housing cost rather than a price, and to look a little below it, so a rate rise before you lock doesn't push you over. The calculator's "if rates rise a point" box shows that margin for your own figures.

The cash on closing day

The monthly payment gets the attention, but plenty of purchases strain on the cash side. The down payment is only the largest of several checks. On home purchase loans in 2023, lender and settlement charges, which include origination fees, discount points, the appraisal and title costs, had a median of $6,684, according to the CFPB's analysis of HMDA data. That figure leaves out prepaid interest, the first year of homeowners insurance, the opening deposit into an escrow account and any transfer taxes, all of which you also pay at or before closing.

In the example, a $40,000 down payment on a $256,000 home is about 15.6%, below the 20% that avoids private mortgage insurance on a conventional loan. Mortgage insurance is not a penalty to avoid at any cost; it is the price of buying sooner with less saved. On a conventional loan it comes off automatically when the scheduled balance reaches 78% of the home's original value, and you can ask to cancel it at 80% if you are current and the home has held its value (CFPB). What is worth avoiding is a down payment so large that it empties the emergency fund, because the first year of ownership has a way of finding a water heater or a roof leak.

Loan size matters too. In 2026 the conforming loan limit for a one-unit home is $832,750 in most of the country and up to $1,249,125 in high-cost areas (FHFA). Above that you are borrowing a jumbo loan, where each lender sets its own terms, often with stricter limits on debt-to-income and larger reserve requirements.

What to consider before you shop

1. Write down your fixed costs. List what leaves your account every month that a lender won't see: childcare, insurance premiums, tuition, support for family. Those decide the budget answer more than income does.
2. Decide your monthly number before your price. A housing cost you can carry on a bad month is a better anchor than a price that fits on a good one.
3. Price the house you're looking at, not the average one. Property tax ranged from about 0.31% of home value in Hawaii to 1.79% in Illinois in NAHB's 2024 figures, and insurance quotes vary even more. Get both for the actual address.
4. Keep the cash separate. Down payment, closing costs, and an emergency fund you don't touch are three different piles.
5. Treat the preapproval as a ceiling. It is useful for making an offer, and it says nothing about what you should spend.

The short version

A lender's approval answers how much it is prepared to lend you. Your budget answers how much you can repay while still living the rest of your life. The first is built from debts and gross income; the second has to include the costs that never appear on a credit report. Work out both, notice the gap, and decide on purpose where in that gap you want to land.

Run your own figures in the home affordability calculator, which uses this week's Freddie Mac rate and shows all three answers. Once you have a specific house in mind, the mortgage calculator breaks down its payment month by month, and our guide to mortgage APR vs. interest rate explains how to compare the loan offers that follow.

iGrow Wealth publishes educational content about personal finance. This article is not personalized financial, tax, or legal advice, and iGrow Wealth is not a lender or mortgage broker. The worked example is illustrative. Underwriting rules, rates, taxes and insurance vary by lender, program, location and borrower. Confirm figures with a lender's Loan Estimate and consider speaking with a qualified professional before you buy.