The 60-Second Answer
At 2026 rates (6.5–7%), most buyers can afford a home priced at roughly 3 to 4 times their gross annual household income — assuming average debts and about 10% down. A $75,000 household lands around $250,000–$290,000; a $120,000 household around $380,000–$460,000. The exact number comes from one ratio lenders never skip: your housing payment can't exceed about 28% of gross monthly income.
- Lenders qualify you on gross (pre-tax) income, not take-home pay
- Existing debts shrink your budget fast — a $500/month car loan can cut your home price by $60,000–$80,000
- The rate you lock matters more than the sticker price: 1% higher rate ≈ 10% less house for the same payment
The 28/36 Rule — Where Every Lender Starts
Before a lender approves your mortgage, they apply two debt-to-income (DTI) ratios. These are the guardrails every bank uses — knowing them lets you calculate your own limit before you set foot in a bank.
| Rule | What it limits | Typical cap |
|---|---|---|
| Front-end (housing ratio) | Monthly housing costs (P&I + tax + insurance + HOA) | 28% of gross monthly income |
| Back-end (total DTI) | All monthly debts combined (housing + cards + loans) | 36–43% of gross monthly income |
Household earns $8,000/month gross. • 28% front-end cap → max housing payment = $2,240/month • 36% back-end cap → max total debts = $2,880/month • If you already pay $500/month on a car loan → housing budget tightens to $2,380
With rates around 6.5–7%, buyers often qualify for less than they expect. Use the mortgage calculator to find your exact number before talking to an agent.
Down Payment: What Each Level Actually Means
20% down is the textbook answer — but most 2026 buyers put down far less. Here's what each threshold actually means for your monthly payment and total cost:
| Down payment | On $400k home | PMI? | Monthly impact |
|---|---|---|---|
| 3–5% | $12k–$20k | Yes (~$150–250/mo) | Higher payment, PMI until 20% equity |
| 10% | $40k | Yes (lower rate) | Saves ~$100–150/mo vs 5% down |
| 20% | $80k | No PMI at all | Saves $150–300/mo, best rate |
PMI on a $350,000 loan costs $1,750–$5,250/year — and it goes to the lender, not toward your equity. If you're close to 20% down, it almost always pays to wait and save more.
The median US down payment in 2025 was 13.6% — not 20%. First-time buyers averaged just 8%. You don't need to wait until you have 20%.
How Rates Change Everything
The rate isn't just a monthly payment difference — it's a total-cost difference that compounds over 30 years. On a $300,000 loan:
| Rate | Monthly P&I | Total interest paid | Extra vs 5.5% |
|---|---|---|---|
| 5.5% | $1,703 | $313,000 | — |
| 6.5% | $1,896 | $382,000 | +$69,000 |
| 7.5% | $2,097 | $455,000 | +$142,000 |
Going from a 680 to 760+ credit score typically cuts your rate by 0.5–1.0%. On a $350,000 loan, that's $30,000–$65,000 in savings over 30 years. Check your credit before you apply.
Full Worked Example: $95,000 Household Income
Household income: $95,000/year ($7,917/month gross) 1. Max housing payment (28%): $7,917 × 0.28 = $2,217/month 2. Subtract taxes + insurance ($500 est.) → $1,717 for principal & interest 3. At 6.75% for 30 years → $1,717/month supports a $261,000 loan 4. With 10% down ($29,000) → home price of $290,000 5. Closing costs of ~$8,500 → bring $37,500 to closing Result: comfortably buy in the $270,000–$295,000 range.
Plug your real income and debts into the Home Affordability Calculator to get your personal number in 30 seconds.
What Lenders Count as Income — and as Debt
The 28/36 math only works if you feed it the same numbers a lender will. Both sides of the ratio have rules that surprise first-time buyers:
| Item | Counts? | Detail |
|---|---|---|
| Base salary / hourly wages | Yes | Gross amount, verified with pay stubs and W-2s |
| Bonus, overtime, commission | Usually | Needs a 2-year history; lenders average it |
| Self-employment income | Yes | 2 years of tax returns; they use your NET (after-deduction) figure |
| Minimum credit-card payments | Yes (debt) | The minimum on your statement, even if you pay in full |
| Student loans | Yes (debt) | Actual payment, or 0.5–1% of the balance if deferred |
| Utilities, groceries, childcare | No | Not in DTI — which is why the 28% cap can still feel tight |
If you write off $30,000 of business expenses on a $110,000 gross income, lenders qualify you on $80,000 — cutting your maximum home price by roughly $100,000. Aggressive deductions save tax but shrink your mortgage.
Five Ways to Raise Your Number Before You Apply
- 1Pay off (or pay down) the car loan and cards — erasing $400/month of debt payments adds roughly $55,000–$65,000 of home-buying power at 6.75%
- 2Boost your credit score past 740 — a 0.5% rate improvement on a $320,000 loan saves about $105/month and $38,000 over 30 years
- 3Save toward 10%+ down — bigger down payment means a smaller loan, cheaper (or no) PMI, and often a better rate tier
- 4Shop at least 3 lenders — Freddie Mac research shows comparing 4+ quotes saves an average of $1,200/year in interest
- 5Consider buying points only if you'll stay 6+ years — 1 point (1% of the loan) typically cuts the rate 0.25%, breaking even around year 5–7
A pre-approval letter is a lender running this exact math on your documents. Get one before house-hunting — it's free, takes 1–3 days, and tells you your real ceiling.