How much house can you afford?
By Luigi PooleUpdated
Lenders cap what they'll approve using two debt-to-income ratios, then price in taxes, insurance, and often PMI on top of principal and interest. The number that comes back is the most you could borrow — not what you should actually spend each month.
"How much house can I afford" sounds like one question, but a lender answers three separate ones before quoting you a number: what share of your income the housing payment alone can take, what share all your debt combined can take, and how much cash you have sitting in the bank on closing day. The monthly figure that comes back isn't principal and interest either — it's principal, interest, taxes, insurance, and often mortgage insurance, bundled into one payment that behaves differently as the inputs move.
Two things trip up most first-time buyers. The first is treating a pre-approval letter as a target rather than a maximum — the number a lender is willing to lend and the number you can comfortably spend are calculated from entirely different information, and only one of them knows what else you're saving for. The second is underestimating how much a smaller down payment costs beyond the obvious: it enlarges the loan, and below a threshold, it adds a monthly insurance premium that exists purely to protect the lender, not you.
Front-end and back-end: the two ratios that set the ceiling
Every affordability calculation starts with debt-to-income, and it's actually two ratios, checked independently. The front-end ratio is your proposed housing payment divided by gross monthly income — it asks whether the house alone fits. The back-end ratio adds every other debt payment you carry — car loans, student loans, credit card minimums — divided by the same income; it asks whether the house fits alongside everything else you already owe. A conventional loan commonly uses something like 28% for the front-end and 36% for the back-end as a starting point, though the exact ceiling shifts by loan program, lender, and your credit profile — government-backed loans in particular tend to tolerate a higher back-end ratio for buyers who already carry more debt.
Take a household earning $8,000 a month gross, with $500 a month already committed to a car loan and a student loan. A 28% front-end cap allows a housing payment of $2,240. A 36% back-end cap allows $2,880 in total debt, which after subtracting the existing $500 leaves $2,380 available for housing. The two numbers disagree, and the lower one wins — here, the front-end ratio binds at $2,240, not the back-end. That's common: back-end room usually exceeds front-end room, because most households don't carry enough separate debt to make the back-end the tighter constraint. Run your own income and debts through the affordability calculator to see which ratio would bind for you.
PITI is the payment that actually has to fit
Whichever ratio wins, the number it produces is a ceiling on PITI — principal, interest, taxes, and insurance — not on the loan payment alone. Principal and interest is what most people picture when they estimate a payment, and it's the piece that changes with the loan amount and the rate. Taxes and insurance ride along whether or not there's a mortgage on the property at all, and both vary enormously by location: property tax rates differ by a factor of four or five between the cheapest and most expensive counties in the country, and homeowners insurance premiums swing by region for reasons that have nothing to do with the price of the house — flood zone, wildfire risk, and hurricane exposure all move the number independent of square footage. A buyer comparing two similarly priced homes in different states can end up with materially different PITI on identical loans, purely from tax and insurance. If the property carries a homeowners association fee, lenders fold that into the ratio too, even though it isn't part of the PITI acronym — it's still a mandatory monthly obligation and gets treated as one. The mortgage calculator breaks a payment into all of these pieces rather than showing principal and interest alone.
PMI: what a down payment under 20% actually costs
On a conventional loan, a down payment below 20% triggers private mortgage insurance — an extra monthly premium priced as a percentage of the loan balance per year and folded straight into the payment. It exists to protect the lender against default, not the buyer, and its cost depends on the loan-to-value ratio and your credit profile: a smaller down payment and a lower credit score both raise the premium. PMI isn't permanent. Under federal law it must be cancelled automatically once the loan amortizes down to 78% of the home's original value, and a borrower can request removal earlier, at 80%, with a fresh appraisal showing enough equity. FHA loans work differently — their mortgage insurance premium is typically priced lower up front but often lasts for the life of the loan unless the buyer refinances into a conventional mortgage later, which is one of several reasons a refinance is worth revisiting once equity builds.
The same house, two down payments
The clearest way to see PMI's effect is side by side, on one property. Take a $320,000 home financed with a 30-year fixed loan at a hypothetical 7% rate, a 1.1% property tax rate, and a $1,380 annual insurance premium — the tax and insurance figures held constant, since the down payment changes neither one.
| 10% down | 20% down | |
|---|---|---|
| Down payment | $32,000 | $64,000 |
| Loan amount | $288,000 | $256,000 |
| Principal & interest | $1,916 | $1,703 |
| Property tax | $293 | $293 |
| Homeowners insurance | $115 | $115 |
| PMI | $132 | $0 |
| Total PITI | $2,456 | $2,111 |
Against the household from the earlier example — $8,000 gross monthly income, a $2,240 front-end cap, and $2,380 of back-end-derived housing room — the 10% down scenario fails both ratios: $2,456 exceeds the $2,240 front-end cap by $216, and stacked against the household's $500 of other debt, it exceeds the back-end-derived room too. The 20% down scenario clears both, with $129 of front-end room and $269 of back-end room to spare. The loan shrank by $32,000, but the payment fell by $345 — more than the smaller loan alone explains, because eliminating PMI removed its own $132 line entirely.
| Same $320,000 home, same rate — PITI by down payment | |
|---|---|
| 10% down | $2,456/mo |
| 20% down | $2,111/mo |
30-year fixed loan at a hypothetical 7% rate; property tax 1.1%/year and insurance $1,380/year held constant across both scenarios; PMI applied only below 20% down.
Closing costs are a separate number, due all at once
The down payment isn't the only cash a purchase requires. Closing costs — the lender's origination fee, the appraisal, title insurance, recording fees, and a handful of smaller line items — typically run somewhere between 2% and 5% of the loan amount, due in full at closing rather than spread across the mortgage. On the $256,000 loan in the 20%-down scenario above, 3% works out to roughly $7,680; combined with the $64,000 down payment, that's about $71,680 in cash needed before a single moving box is loaded, well before the first mortgage payment comes due. None of that shows up in the DTI ratios or the PITI number — it's a separate savings target with its own timeline, which is why the down payment guide treats saving for the down payment and saving for closing costs as two line items, not one.
Why the pre-approval letter is a ceiling, not a budget
A DTI ratio only knows about debt payments it can see on a credit report — it has no idea what you're setting aside for retirement, what childcare costs, or what you'd rather spend on anything that isn't housing. The back-end cap effectively assumes that whatever isn't already owed to a lender is available for a mortgage, which is a reasonable assumption for underwriting risk and a poor one for planning a life. Two households with identical income and identical debt can have completely different amounts they should actually spend on housing, because the ratio can't see retirement contributions, a want to travel, or a plan for one income to drop to part-time for a few years.
The practical result is that lenders routinely approve buyers for more house than they'd choose with a full view of their own budget — sometimes considerably more. Comparing the numbers against what renting the same footprint would actually cost is one useful check, precisely because a rent comparison forces a real monthly figure into the conversation instead of a ratio-derived ceiling.
Building your own number, in the right order
The DTI math above works backward from what a lender will approve. A more useful order works forward, from what you can actually see in your own spending: what a comfortable total housing payment looks like against real numbers, not against 28% of gross pay; how much you can put down without draining the reserve you'd want after moving in; and what closing costs will take out of savings that same month. Run that number — not the pre-approval ceiling — through the mortgage calculator or affordability calculator to see what price range it actually supports, at the down payment size you can realistically reach. The lender's letter tells you the most a bank will lend. It was never designed to tell you the right amount to spend.
Common follow-ups
What DTI ratios do lenders actually use?
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Conventional loans commonly check two ratios — around 28% of gross income for the housing payment alone (front-end) and around 36% including every other debt payment (back-end) — though the exact ceilings shift by loan program, lender, and credit profile, and government-backed loans often tolerate a higher back-end ratio.
How can I avoid PMI without saving 20% down?
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Some lenders offer piggyback second loans that split the financing to stay under the 80% loan-to-value threshold, and a few low-down-payment programs waive PMI for a slightly higher rate instead. Both trade one cost for another — compare the total cost, not just the absence of a PMI line.
Does a bigger down payment always lower the monthly payment?
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Almost always, through a smaller loan and, below 20% down, a removed PMI premium. Property tax and insurance don't shrink with a bigger down payment, though — both are based on the home's value, not the loan balance, so they stay identical no matter how much you put down.
Why would a lender approve more than I should actually spend?
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Debt-to-income ratios only see payments that show up on a credit report. They can't see retirement contributions, childcare, a planned career change, or what you'd rather spend elsewhere, so the approved amount reflects lending risk, not your budget — treat it as a ceiling, never a target.
Do property taxes really change how much house I can afford?
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Yes, directly — property tax is part of PITI, so a higher local rate shrinks the loan amount that fits inside the same payment cap, the same way a higher interest rate would. Two identically priced homes in different counties can support different loan sizes purely from the tax rate.