Buying a home is one of the biggest financial decisions you’ll make — and it all starts with knowing how much you can afford. Before you fall in love with a dream home, take the time to set a realistic and comfortable budget. Here’s how:
1. Understand Your Financial Picture
Start by looking at your income, expenses, savings, and debt. A good rule of thumb is that your monthly housing costs (including mortgage, taxes, and insurance) should be no more than 28–30% of your gross monthly income.
2. Pay Down Debt Before Applying for a Mortgage
Lenders closely examine your debt-to-income (DTI) ratio during the loan approval process. The lower your debt, the better your chances of securing a mortgage and a favorable interest rate. Paying down credit cards, student loans, or car payments not only improves your DTI but also frees up income for home-related expenses.
3. Use the 28/36 Rule
The 28/36 rule is a popular budgeting guideline in mortgage lending. It helps determine how much debt you can comfortably carry by breaking it into two ratios:
🔹 28% — Front-End Ratio (Housing Expenses)
No more than 28% of your gross monthly income should go toward housing expenses, which typically include:
- Mortgage principal and interest
- Property taxes
- Homeowner’s insurance
- Mortgage insurance (if applicable)
- HOA fees (if applicable)
✅ Example:
Gross monthly income: $6,000
28% of $6,000 = $1,680
→ That’s your recommended max monthly housing budget.
🔹 36% — Back-End Ratio (Total Debt Load)
No more than 36% of your gross monthly income should go toward all monthly debt obligations, including:
- Housing costs (see above)
- Credit card payments
- Car loans
- Student loans
- Personal loans
- Alimony or child support
✅ Example:
Gross monthly income: $6,000
36% of $6,000 = $2,160
→ That’s your maximum total monthly debt limit.
4. Get Pre-Approved — Not Just Pre-Qualified
A pre-qualification gives a rough idea of what you might afford, but a pre-approval is a formal review of your credit, income, and assets by a lender. It shows sellers you’re serious and financially ready, giving you a stronger edge when making offers.
5. Factor in Upfront and Ongoing Costs
Beyond your down payment, there are closing costs, moving expenses, utility deposits, and regular home maintenance to consider. Be sure your budget allows room for these, and keep an emergency fund intact for unexpected repairs or financial hiccups.
6. Consider Lifestyle & Future Goals
Think long term. Will you need savings for travel, children, business plans, or retirement? Choose a mortgage that supports your life goals—not one that restricts them.
7. Don’t Open New Credit Lines During the Buying Process
Once you’re preparing to buy — especially after getting pre-approved — avoid opening new credit cards, financing large purchases, or taking out loans. These actions can lower your credit score or increase your DTI, potentially putting your loan at risk. Wait until after closing before making any big financial changes.
Bottom Line
Being realistic about what you can comfortably afford helps you buy with confidence — and avoid regret later. If you’re not sure where to start, a trusted lender or real estate professional can help you crunch the numbers and guide you every step of the way.