How Much House Can You Afford?
The bank will tell you what they're willing to lend you. That number is based on risk models, not your life. It doesn't account for your student loans, your childcare costs, your travel habits, or the fact that you'd like to retire someday.
If you buy a house based solely on the maximum amount a lender approves you for, you are almost guaranteed to end up "house poor"—meaning all your money goes to your mortgage, leaving nothing for the rest of your life.
Here's how to figure out the number that actually matters.
Start with the 28/36 Rule
The traditional guideline is the 28/36 rule: your monthly housing costs (mortgage principal, interest, taxes, and insurance—often called PITI) should not exceed 28% of your gross monthly income. Your total debt payments (housing plus car loans, student loans, credit cards, etc.) should not exceed 36%.
While lenders will often approve you for debt-to-income (DTI) ratios up to 45% or even 50%, pushing your budget to that limit is dangerous. It leaves zero margin for error if your car breaks down, your roof needs replacing, or you experience a medical emergency.
Calculate Your True Monthly Cost
Your mortgage payment is only the beginning. When calculating your affordability, you must include:
• Property taxes (which can increase every year)
• Homeowners insurance
• Private Mortgage Insurance (PMI) if you put down less than 20%
• HOA fees (if applicable)
• Maintenance and repairs (budget 1-2% of the home's value annually)
Work Backwards from Your Comfort Zone
Instead of asking "How much can I borrow?", ask "What is the maximum monthly payment I am comfortable making?"
Look at your current rent. Look at your monthly savings rate. If your current rent is $2,000 and you comfortably save $1,000 a month, your absolute maximum housing budget is $3,000—and even that leaves you with zero monthly savings.
Once you know your comfortable monthly payment, use a mortgage calculator to work backwards to the purchase price, factoring in current interest rates, taxes, and insurance. That is your true affordability ceiling. Don't let a lender tell you otherwise.
Actionable Steps
Calculate your true monthly cost. Use an external tool like Bankrate's Mortgage Calculator (bankrate.com/mortgages/mortgage-calculator) to add property taxes, homeowners insurance, HOA fees, and maintenance to understand your true cost of living.
Set your own ceiling. Determine the maximum monthly payment you are comfortable making based on your actual lifestyle and budget, not the maximum amount the bank will lend you.
Map your financial readiness. Use ARRO to track your debt-to-income ratio, organize your savings, and build a realistic picture of what you can truly afford before you talk to a lender.
Frequently Asked Questions
Why does the bank approve me for more than I can afford?
Lenders use gross income (before taxes) and don't account for living expenses like groceries, childcare, or retirement savings. Their models are designed to determine the maximum risk they can tolerate, not what is financially healthy for you.
What is PITI?
PITI stands for Principal, Interest, Taxes, and Insurance. It represents your total monthly housing payment. When calculating affordability, you must look at PITI, not just the principal and interest on the loan.
Do I have to pay PMI?
Private Mortgage Insurance (PMI) is usually required if your down payment is less than 20%. It protects the lender if you default on the loan. It adds to your monthly cost but allows you to buy a home sooner without a massive down payment.
How much should I budget for home maintenance?
A common rule of thumb is to budget 1% to 2% of the home's purchase price per year for maintenance and repairs. If you buy a $400,000 home, expect to spend $4,000 to $8,000 annually on upkeep.
Can ARRO help me figure out my budget?
Yes. ARRO's Readiness Score takes a holistic look at your financial picture, helping you understand how your credit, debt, and savings translate into true buying power and affordability. ────────────────────────────────────────────────────────────
Haj Khalsa is the founder of ARRO, Creative Acorn, and HANGTIME — a Santa Fe-based outdoor lifestyle brand. He is also a rock climber, telemark skier, and dad.