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How to Calculate How Much House You Can Afford

If you want to dig a little deeper on how much house you can afford and get into some of the more nitty-gritty details, I’ve got you covered. We’re going to go over all the numbers step by step. (Don’t worry if math isn’t your thing—I promise I’ll break everything down and make it super simple to understand.)

1. Figure out 25% of your take-home pay.

To calculate how much house you can afford, use the 25% rule we talked about earlier: Never spend more than 25% of your monthly take-home pay (after tax) on monthly mortgage payments. That includes your mortgage principal, interest, property taxes, home insurance, PMI and HOA fees. 

Just add up how much you (and your spouse, if you’re married) bring home each month and multiply that by 0.25. For example, here’s what that would look like with a household take-home pay of $6,000:

$6,000 × 0.25 = $1,500

Easy, right? Stick to that number and you’ll have plenty of room in your budget to tackle other financial goals, like investing for retirement or saving for your kid’s college.

2. Use a mortgage calculator to determine your home budget.

Now that you’ve calculated 25% of your take-home pay to figure out your maximum monthly payment, we need to translate that into the amount you can afford to spend on a house—and how much you should budget for a down payment.

You could crunch the numbers on that yourself by using a complicated formula (no thanks!), but you’ll save yourself a lot of time and headaches by simply using our handy-dandy free Mortgage Calculator. It will let you try out different combinations to find the right mortgage amount, interest rate, and down payment combo for your budget.

Go give it a try!

By the way, you should always aim for a down payment of at least 20%. Not only does a bigger down payment mean smaller monthly payments and less debt, but putting 20% down means you won’t have to pay for private mortgage insurance (PMI)—potentially saving you hundreds every month.

A 5–10% down payment is fine if you’re a first-time home-buyer, but get ready for bigger monthly payments and PMI.

3. Calculate your closing costs.

A down payment isn’t the only cash you’ll need to save up to buy a home. There are also closing costs to consider. Things like . . .

Appraisal fees

Home inspections

Loan origination fees

Credit reports

Attorneys

Home insurance

Property taxes

On average, closing costs are about 3–4% of the purchase price of your home—and you need to be able to pay for them with cash.1 So start saving! Your lender and real estate agent will let you know exactly how much your closing costs are so you can pay for them on closing day.

Whatever you do, don’t let the closing costs keep you from making the biggest down payment possible. The bigger the down payment, the less you’ll owe on your mortgage!

4. Factor in homeownership costs.

Here’s the truth: Owning a home is expensive. Between repairs, upgrades and maintenance, those bills can add up. Bills such as . . .

Increased utilities: On average, if you’re used to paying $100–150 on utilities as a renter in an apartment, you might need to bump up that budget closer to $400 a month as a homeowner.2

Maintenance and repairs: Most homeowners spend about $3,200 a year on home maintenance projects.3 This could include things like landscaping, or routine services like pest control and HVAC tune-ups.

Upgrades and additions: Minor home upgrades can cost major bucks, so you’ll need to plan for that in your budget. For example, a minor kitchen remodel can cost over $26,000.4

That’s why you should save up an emergency fund worth 3–6 months of your typical expenses before you buy a house (in addition to paying off all your consumer debt). When you don’t have an emergency fund, any unexpected expense that pops up can become a crisis. But with an emergency fund, an unexpected expense becomes nothing more than an inconvenience.

So, when you’re figuring out how much house you can afford, don’t forget to factor saving for emergencies into the equation.

Which Mortgage Option Should You Choose?

Whew! All that math wasn’t too bad, was it? Now, let’s talk about different types of mortgages—because the mortgage you choose will also affect how much you can spend on a house.

Picking the right type of mortgage is a big deal, because a lot of them charge you tens of thousands of dollars more in interest and fees. The most common mortgage types that fall into that category are FHA, VA, USDA, 30-year and adjustable-rate mortgages. Stay far away from those!

Instead, make sure your mortgage checks both of these boxes:

A fixed-rate conventional loan: With this option, your interest rate never changes during the life of the loan. This keeps you protected from the rising rates of an adjustable-rate loan.

A 15-year term: Your monthly payment will be higher with a 15-year term, but you’ll pay off your mortgage in half the time of a 30-year term . . . saving tens of thousands in interest.

Now, your mortgage lender will probably approve you for a bigger mortgage than you can afford. Don’t let them decide your home-buying budget. Ignore the bank’s numbers and stick with your own.

Knowing your house budget and sticking to it is the only way to make sure you get a mortgage you can pay off as fast as possible.

How Will My Debt-to-Income Ratio Affect Affordability?

When you apply for a mortgage, lenders usually look at your debt-to-income ratio (DTI)—this is your total monthly debt payment divided by your gross monthly income (before tax), written as a percentage.

Lenders often use the 28/36 rule as a sign of a healthy DTI—meaning you won’t spend more than 28% of your gross monthly income on mortgage payments and no more than 36% of your income on total debt payments (including a mortgage, student loans, car loans and credit card debt).

If your DTI ratio is higher than the 28/36 rule, some lenders will still approve you for a loan. But they’ll charge you higher interest rates and add extra fees like mortgage insurance to protect themselves (not you) in case you get in over your head and can’t make your mortgage payments.

But if you follow our advice for when and what to buy, you’ll be out of debt and buying a home with a payment that’s no more than 25% of your take-home pay. Your debt-to-income ratio won’t even be a factor!

How Much House Does Dave Ramsey Say I Can Afford?

For decades, Dave Ramsey has told radio listeners that the best way to buy a house is paying for it in cash. That’s right—a 100% down payment. But if you do get a mortgage, Dave Ramsey recommends following the 25% rule—remember, that means never buying a house with a monthly payment that’s more than 25% of your monthly take-home pay on a 15-year fixed-rate conventional mortgage.

Why is all this important? Because homeownership can quickly become a nightmare if you don’t have your money in order.

Think about it, you guys: If you’re already overwhelmed by your house payment and don’t have money saved for emergencies, you’ll be in a super tough spot if your refrigerator loses its cool or your HVAC unit fizzles out and needs to be replaced. I don’t want that to happen to you.

What Salary Do You Need to Buy a $400,000 House?

Now let’s take what we’ve learned and put it into an example. Let’s say you want to buy a $400,000 house. First, you’ll need to do the hard work of saving up $80,000 in cash as a 20% down payment. Or if you already own a home, make sure you have enough equity to pay off your current mortgage and cover your down payment when you sell it.

With a 15-year mortgage at a 5% interest rate, your monthly payment would be around $2,500 (that’s only principal and interest). To cover that payment, you’d need to earn a monthly take-home pay of at least $10,000 ($2,500 is 25% of $10,000).

So, to buy a $400,000 home, your annual take-home salary would have to be more than $120,000 ($10,000 x 12 months). But you’d actually need more than that after adding in the cost of property taxes and home insurance.

If that doesn’t sound like you, don’t worry. You have a few options. You could save a bigger down payment to lower your monthly mortgage payment until it’s no more than 25% of your take-home pay. Or you could look for a smaller starter home in a more affordable neighborhood.

The Bottom Line

Can I just say I love that you’re taking the time to do research like this before deciding to become a homeowner? I always feel so bad for people who buy a house without knowing what they’re getting into and wind up with a huge money mess on their hands.

Luckily, that won’t be you! Just keep working hard to save money and don’t forget the 25% rule, and you’ll be in really good shape.