What is Home Affordability?
Home affordability determines the maximum home price you can purchase based on your income, down payment, debts, and credit profile. US lenders use the 28/36 rule (housing cost under 28% of gross, total debts under 36%) plus DTI caps from Fannie Mae, Freddie Mac, FHA, and VA. Check your monthly costs with the Mortgage Calculator and upfront costs with the Closing Costs Calculator.
The Formula
Max Housing Payment = Gross Monthly Income × 0.28 Max Mortgage = Present Value of (Max Housing Payment − Tax − Insurance − PMI − HOA) at current rate over term Max Home Price = Max Mortgage + Down Payment
Lenders also cap total DTI (mortgage + car loans + student loans + credit cards) at 36-45%. Your actual qualification may be lower than the 28% rule if you have other debts.
Worked Example
A buyer in Charlotte, NC earns $90,000/year and has saved a $40,000 down payment. They have $400/month in student loans and a $300 car payment.
- Gross monthly income = $90,000 ÷ 12 = $7,500
- Max housing payment (28%) = $7,500 × 0.28 = $2,100
- Back out $250 taxes + $130 insurance → $1,720 available for P&I
- At 6.75% 30-year, $1,720/mo supports a mortgage of ~$265,000
- Max home price = $265,000 + $40,000 = $305,000 (13% down)
- Closing costs (2.5%) = ~$7,600
📌 Maximum affordable home: $305,000 with 13% down, the buyer still needs roughly $7,600 in closing costs and 3-6 months reserves on top of the down payment.
Why This Matters
Realistic expectations
Knowing your maximum budget before house hunting saves weeks of touring homes you cannot qualify for. It also strengthens your offer position, US sellers and listing agents expect a pre-approval letter before presenting offers.
Joint income advantage
Joint applicants can combine incomes, dramatically increasing borrowing power. A couple earning $70,000 + $60,000 can afford roughly $440,000 vs one earning $70,000 alone at $240,000. Both incomes are underwritten.
Location-driven affordability gaps
The same $90,000 salary buys vastly different homes across US metros. NAR data shows median home prices range from $190,000 in markets like Memphis and Indianapolis to over $1,200,000 in San Jose and San Francisco. Running the affordability calculation for your target market before relocating or committing to a job offer prevents sticker shock and wasted search time.
Common Mistakes
❌ Borrowing the maximum available
Lenders may qualify you at 45% DTI, but personal finance advisors recommend keeping housing under 25% of take-home pay. Maximum borrowing leaves zero buffer for property tax reassessments, roof replacements, or job loss. The median US homeowner spends 22% of income on housing (Census ACS data).
❌ Forgetting closing costs and reserves
Beyond the down payment, you need 2-5% of purchase price in closing costs and 3-6 months of reserves to qualify for most loans. On a $400,000 home with 10% down, that is $40,000 down + $10,000 closing + $18,000 reserves = $68,000 cash.
❌ Not accounting for property tax variation by state
Property tax rates vary from 0.3% in Hawaii to 2.5% in New Jersey per Tax Foundation data. On a $400,000 home, that is a $1,200/year vs $10,000/year difference in annual housing cost. High-tax states like NJ, IL, TX, and CT reduce your effective buying power by tens of thousands of dollars compared to low-tax states like HI, AL, and CO.
Industry Benchmarks
| Category | Good | Average | Poor |
|---|---|---|---|
| Down payment as % of price | 20%+ | 8-20% | Below 5% |
| Debt-to-income ratio | Below 30% | 30-43% | Above 45% |
| Cash reserves after closing | 6+ months of PITI | 3-6 months | Below 2 months |
Source: NAR Profile of Home Buyers & Sellers and Fannie Mae Guidelines
Benchmark data sourced from NAR Profile of Home Buyers & Sellers and Fannie Mae Guidelines.