How Much Home Can You Really Afford? A Straight-Talk Guide for First-Time Buyers

The right home is not just the one a lender will approve—it’s the one that fits within a budget without creating financial strain. Affordability is determined by balancing income, existing debt, housing costs, and loan program requirements. It’s also important to consider future expenses like maintenance, utilities, and unplanned repairs.

1. Understanding Debt-to-Income Ratio (DTI)

Debt-to-income ratio is the primary affordability metric used by lenders. It compares monthly debt payments to gross monthly income (pre-tax income).

Each loan program will have maximum allowable debt to income ratios, but generally, its advised to keep your monthly housing expense under 28%-39% of your pre-tax monthly income.

2. Understanding the Full Housing Payment (PITI)

Affordability calculations must include the full monthly payment, not just the loan’s principal and interest:

Principal & Interest: Based on the loan amount, interest rate, and term.

Property Taxes: Rates vary by state, county, and municipality; can be hundreds per month.

Homeowners (& Flood Insurance if applicable) Insurance: Required by lenders; averages $1,200–$1,500 per year but varies widely.

Mortgage Insurance: Required on most loan programs with less than a 20% down payment, required always on FHA loans.

Home Owners Association Dues (HOA Dues) :For condos and developments

3. Avoiding the “House-Poor” Trap

A home purchase should allow for savings, maintenance, and lifestyle expenses. The Consumer Financial Protection Bureau recommends keeping a 3–6 month emergency fund intact rather than using all savings for the down payment and closing costs.

4. Planning for the Future

Property taxes and insurance premiums can increase annually. Budgeting for these increases protects against payment shock. Maintenance should also be factored in and often you can obtain the sellers’ current expenses in order to anticipate what the costs might be.

Key Takeaway

Affordability is not just about lender limits—it is about balancing monthly obligations, maintaining reserves, and choosing a program that aligns with long-term financial stability.