When you ask a bank "How much house can I afford?", they will tell you the maximum they are willing to lend you. But that number is often much higher than what you should actually spend. To build wealth, you need to find the sweet spot between what the bank says and what your budget allows.
The Gold Standard: The 28/36 Rule
Lenders traditionally use the 28/36 rule to determine your affordability. It’s a two-part test that measures your gross (pre-tax) income against your current and future debt:
The Front-End Ratio (28%)
Your total housing payment (Principal, Interest, Taxes, and Insurance) should not exceed 28% of your gross monthly income.
The Back-End Ratio (36%)
Your total debt payments—including your new mortgage, car loans, student loans, and credit cards—should not exceed 36% of your gross income.
Factors That Impact Your Budget
Beyond your income, several variables change how much house you can purchase. Understanding these helps you use an affordability calculator more effectively:
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01
Interest Rates
Even a 1% difference in interest rates can change your purchasing power by tens of thousands of dollars.
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02
The Down Payment
A 20% down payment removes the need for Private Mortgage Insurance (PMI), lowering your monthly cost significantly.
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03
Property Taxes & HOA
These are "hidden" costs that vary by location and can add hundreds to your monthly payment.
Calculate Your Limit Instantly
Plug in your income and debts to see exactly what price range fits your lifestyle using the 28/36 rule.
Why DTI is the Most Important Number
Your Debt-to-Income (DTI) ratio is the primary tool lenders use to manage risk. If your DTI is too high, you are at a greater risk of defaulting on your loan. By using a Loan EMI Calculator in conjunction with an affordability tool, you can see how different loan terms (15-year vs 30-year) affect this crucial ratio.
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