Home Affordability Guide: What You Can Really Spend

Affordability ≠ approval

Lenders approve buyers on debt-to-income ratios. Approval tells you what a bank is willing to lend — not what you should actually borrow.

Affordability is what leaves you with reserves intact, retirement funded, and your life unchanged after the mortgage payment clears. Approval is roughly 20–35% higher than affordability for most buyers.

The lender's math

Two ratios dominate underwriting:

• Front-end DTI (housing only) — most conventional lenders want this under 28–32% of gross monthly income.
• Back-end DTI (all debts) — most lenders want this under 43% (conventional) or 50% (FHA, with compensating factors).

Gross income is pre-tax. Don't budget against gross income — budget against the net that hits your bank account.

The honest affordability math

A defensible affordability calculation answers four questions:

• What does the true monthly payment (PITI + HOA + PMI) consume as a percentage of net take-home pay?
• After that payment, can you still fund retirement, save for goals, and live the life you actually want?
• After closing, what does your reserve look like in months of total expenses?
• If income drops 25%, can you still cover the payment for 6 months without going into debt?

True payment vs. principal and interest

The rate-sheet number is principal and interest only. The actual payment is PITI + HOA + PMI:

• Property tax: 0.5%–2.5% of value per year, varies by state and county.
• Insurance: $1,200–$8,000+ per year depending on geography and structure.
• HOA: $0–$1,500+/mo depending on community type.
• PMI: ~0.4%–0.9% of loan amount per year if you put less than 20% down.

A True Payment estimate models all of these together — usually $400–$1,200/mo more than the rate sheet suggests.

Stress test your purchase

Three stress tests every buyer should run:

• Income drop: what if you or a partner lost a job for 6 months? Can you cover the mortgage with savings alone?
• Insurance spike: what if the renewal comes in 40% higher (common in Florida and California)? Does the payment still fit?
• Rate reset: if you're considering an ARM, what's the worst-case payment at full reset, and can you still afford it?

Down payment vs. reserves trade-off

The instinct to put down 20% to avoid PMI is right in spirit and often wrong in practice. A 10–15% down payment with 6–12 months of reserves is usually a stronger financial position than 20% down with zero cushion.

PMI is removable once the loan reaches 80% LTV — typically within 5–8 years on a normal amortization, often faster with home appreciation.

Reserves: the cushion that protects everything else

Lenders want to see 2–6 months of housing payment in reserves at closing, depending on loan type. Smart buyers target much more: 6–12 months of total expenses (housing + everything else) post-closing.

Reserves do three jobs: cushion against income disruption, cover unexpected capex, and keep you from putting a $9,000 HVAC replacement on a credit card.

Geographic affordability gotchas

• Coastal Florida and California: insurance can double the payment vs. inland comps.
• Texas and Illinois: property tax can double the payment vs. low-tax states.
• HOA-heavy markets: condo and master-planned-community dues can rival the principal payment.
• New construction: builder rate buy-downs can flatter the payment for the first 2–3 years, then reset.

The 30% rule, updated

The old rule of thumb was 30% of gross income on housing. In high-tax, high-insurance markets, that rule no longer works.

Updated rule: target your true monthly payment (PITI + HOA + PMI) at no more than 28–32% of gross income, and your total debt service at no more than 40%. If the math gets tight, the answer is usually 'less house,' not 'more risk.'