How Much House Can You Really Afford?
The bank might lend you $500k, but that doesn't mean you should take it. Here is the math to keep you safe from being "house poor."
The Golden Rule of Home Buying: 28/36
Lenders use a standard metric called the 28/36 rule to determine your creditworthiness. But smart financial planners use it to determine your safety.
- 28% (Front-End Ratio): No more than 28% of your gross monthly income should go towards housing costs (mortgage principal, interest, taxes, and insurance).
- 36% (Back-End Ratio): No more than 36% of your gross income should go towards all debt payments combined (housing + credit cards + car loans + student loans).
Example Calculation
Let's say you earn $100,000 per year ($8,333/month).
- Max Housing Payment: $8,333 x 0.28 = $2,333/mo
- Max Total Debt Payment: $8,333 x 0.36 = $3,000/mo
If you have a $500/mo car payment and $400/mo student loan (Total $900), your "Back-End" limit for housing drops to $2,100 ($3,000 - $900).
💰 Pro Tip: Don't Forget "Hidden" Costs
Your mortgage payment isn't the only cost. Remember to budget 1-2% of the home's value annually for maintenance/repairs. On a $400k home, that's $4,000-$8,000/year!
Why "House Poor" is Dangerous
Being "house poor" means your beautiful home is eating all your cash flow. You have high equity, but no liquidity. If you lose your job or face a medical emergency, you can't "eat" your home's equity without selling it or refinancing (which takes time).
Sticking to the 28/36 rule ensures you have breathing room for retirement savings, vacations, and life's surprises.
Ready to Run the Numbers?
Use our mortgage calculator to see how interest rates affect your buying power.