How Much of a House Can I Afford — and How Do I Buy One?

A Complete Guide to Home Affordability, Down Payments, and Hidden Costs**

Buying a house is one of the biggest financial decisions most people ever make. Whether you’re a first-time buyer or returning to the market after several years, the same question tends to come first: “How much house can I actually afford?”

Affordability isn’t just about the listing price. It includes your income, your debt, the size of your down payment, your credit score, and a number of costs that continue long after closing day. Understanding these elements early will help you set realistic expectations, avoid surprises, and purchase a home with confidence.

Below is a clear, practical guide to determining affordability and navigating the home-buying process from start to finish.

1. What “Affordability” Really Means When Buying a Home

A house is “affordable” when you can comfortably make all related payments without straining your budget. This includes more than the mortgage itself—taxes, insurance, utilities, and maintenance all matter.

While every buyer’s situation is unique, lenders rely on a few standard financial ratios to decide whether you qualify for a mortgage.

The 28/36 Rule

A common rule of thumb says:

• No more than 28% of your gross monthly income should go toward your housing costs (mortgage, property taxes, and insurance).

• No more than 36% should go toward all monthly debt payments combined (housing + credit cards + student loans + car loans + personal loans).

For example, if your gross monthly income is $6,000:

• 28% of $6,000 = $1,680 recommended max for housing.

• 36% of $6,000 = $2,160 recommended max for all debt.

These limits help ensure you have breathing room for savings, emergencies, and retirement planning.

What Lenders Really Look For

Even if you follow the 28/36 guideline, lenders also evaluate:

• Credit score (higher scores get lower interest rates)

• Down payment size

• Employment history

• Cash reserves (money left over after closing)

• Loan type (conventional, FHA, VA, USDA)

Your interest rate—determined largely by credit score and market conditions—can dramatically impact your affordability. A 1% change in mortgage rate can make a difference of hundreds of dollars per month.

2. How to Estimate Your Own Home-Buying Budget

You can estimate your realistic price range by walking through a simple calculation.

Step 1: Determine your monthly housing budget

Take 28% of your gross monthly income.
If you earn $75,000 per year (about $6,250/month):

• Affordable housing payment ≈ $1,750/month

Step 2: Estimate the components of your housing payment

A typical monthly housing payment includes:

1. Principal (loan repayment)

2. Interest (cost of borrowing)

3. Property taxes

4. Homeowners insurance

5. PMI (if your down payment is < 20%)

6. HOA fees (if applicable)

Using a mortgage calculator helps, but a rough rule of thumb is:

• At 6–7% interest rates, every $100,000 borrowed ≈ $650–$750 per month for principal + interest.

Step 3: Back into your maximum purchase price

If your total housing budget is $1,750/month:

• $1,750/month might translate to a loan amount around $230k–$270k depending on rates and taxes.

• Adding a down payment (e.g., 10% or 20%) increases the purchase price you can afford.

This is a starting point—lenders will give you a more precise figure when you’re pre-approved.

3. Understanding Down Payments: How Much Do You Actually Need?

The traditional advice has always been, “You need 20% down.”
But today, that’s not always realistic—or necessary.

Typical Down Payment Options

• 20% down – Avoids PMI and lowers monthly payment.

• 10% down – Common for many buyers; PMI applies but is usually temporary.

• 3–5% down – Allowed on many conventional loans for qualified buyers.

• 3.5% down (FHA) – Designed for buyers with lower credit scores or smaller savings.

• 0% down (VA and USDA loans) – For eligible veterans or rural/eligible suburban areas.

Benefits of a Larger Down Payment

• Lower monthly mortgage payments

• Lower interest rate

• No or reduced PMI

• Stronger loan application

• More equity from day one

But a smaller down payment can make sense if it helps you buy sooner without draining your savings.

4. Costs Beyond the Mortgage: What Many First-Time Buyers Don’t Expect

The mortgage payment isn’t the only cost of owning a home. Some of these are upfront; others continue for as long as you own the house.

A. Upfront Costs

1. Earnest Money Deposit

A good-faith deposit (usually 1–3% of the purchase price) paid when making an offer. It’s applied to your closing costs or down payment.

2. Home Inspection

Typically $300–$600. This helps you understand the condition of the property and avoid expensive surprises.

3. Appraisal Fee

Usually $400–$700. Lenders require it to confirm the home’s market value.

4. Closing Costs

These are the fees and charges required to finalize your loan—often 2–5% of the purchase price. Closing costs include:

• Lender fees

• Title search and insurance

• Escrow fees

• Prepaid taxes and insurance

• Recording fees

Many buyers underestimate this; for a $350,000 home, closing costs can run $7,000–$15,000.

B. Ongoing Costs of Homeownership

1. Property Taxes

Ranges widely by state and county. Can be a few thousand dollars per year.

2. Homeowners Insurance

Typically $600–$2,000 annually depending on location and property type.

3. Private Mortgage Insurance (PMI)

Required if your down payment is under 20%. Usually 0.5–1% of the loan amount per year. This can be removed once you reach about 20% equity.

4. HOA Fees

If the home is in a community with shared amenities. May range from $50 to $500+ per month.

5. Maintenance and Repairs

A general rule:
Budget 1–2% of the home’s value per year for maintenance.
For a $350,000 home, that’s $3,500–$7,000 annually.

6. Utilities

Water, electricity, natural gas, trash, internet, and possibly sewer or well maintenance.

5. How Your Credit Score Affects Affordability

Your credit score has one of the biggest impacts on how much house you can afford because it directly affects your interest rate.

Better Credit = Lower Monthly Payment

For example:

• A buyer with 760 credit may get a significantly lower rate than a buyer with 640 credit.

• On a $350,000 mortgage, the difference might be $200–$400 per month.

Ideal Credit Ranges for Home Buying

• 740+ – Excellent (best rates)

• 700–739 – Very good

• 660–699 – Good (qualifies for most loans)

• 620–659 – Acceptable (FHA may be easier)

• Below 620 – Harder to qualify; FHA often the best option

Improving your credit—even by 20–40 points—can save you tens of thousands over the life of the loan.

6. Getting Pre-Approved: Why It Matters

Before shopping for a home, get pre-approved by a mortgage lender. This is more than a pre-qualification—it’s a verified review of your income, debts, and credit.

Benefits of being pre-approved

• Gives you a clear budget

• Shows sellers you’re serious

• Helps you move quickly in competitive markets

• Reveals issues in advance (credit, documentation, debt-to-income ratio)

A strong pre-approval can make your offer more appealing than someone offering similar terms without one.

7. How to Choose the Right Loan Type

There are several common mortgage types. Choosing the right one depends on your financial profile and goals.

Conventional Loan

• Best for strong credit and stable income

• Requires 3–20% down

• PMI cancels at 20% equity

FHA Loan

• More flexible with credit

• Only 3.5% down required

• Higher mortgage insurance costs

VA Loan

• 0% down

• No PMI

• For veterans, active-duty service members, and eligible spouses

USDA Loan

• 0% down

• For eligible rural or suburban homes

• Income caps apply

Fixed vs. Adjustable Rate

• Fixed-rate mortgage: predictable for life of loan (most buyers choose this)

• Adjustable-rate mortgage (ARM): starts lower but can rise later

8. The Steps to Buying a Home (Start to Finish)

Here’s a simplified roadmap:

1. Evaluate your budget

Know what you can afford before you fall in love with a home.

2. Save for down payment + closing costs

Build a buffer for inspections, appraisal, and moving expenses.

3. Improve your credit (if needed)

Small improvements can significantly lower your mortgage payments.

4. Get pre-approved

Gather tax returns, pay stubs, bank statements, and identification.

5. Find a real estate agent

Choose someone experienced in your target area.

6. Start house hunting

Tour homes, explore neighborhoods, and refine your priorities.

7. Make an offer

Your agent helps determine a fair but competitive price.

8. Complete inspections and appraisal

Use inspection results to negotiate repairs or credits.

9. Finalize your financing

Lender completes underwriting and confirms all documents.

10. Close on the home

Sign your documents, pay closing costs, and receive the keys.

9. Common Mistakes to Avoid

A few missteps can derail your budget or even cause your loan approval to fall through.

Don’t:

• Make major purchases before closing (cars, furniture)

• Take on new debt

• Switch jobs mid-process (unless necessary)

• Skip the inspection

• Forget about ongoing maintenance costs

• Max out your affordability (leave room for savings)

10. Final Thoughts: Buy a Home When You’re Financially Ready—Not Rushed

The right time to buy a house is when:

• Your budget is stable

• You have savings for a down payment + closing costs

• Your credit is strong enough to secure a favorable rate

• You’ve accounted for long-term costs like taxes and maintenance

• You feel confident you can manage the payment even if life changes

A home is not just a financial investment—it’s a place to live your life. Understanding affordability, preparing for upfront and ongoing costs, and approaching the process methodically will help you make a decision you can feel good about for years to come.