Setting Your Budget: How Much Should You Spend on a House?

Buying a home can be tempting, particularly in a vibrant market. In 2025, experts in the industry are estimating high demand with a 10% increase in sales. However, you must look closely at your current budget and financial situation to avoid becoming house-rich and cash-poor.

The costs associated with buying a home do not just entail a monthly payment of principal and interest. You may also need to budget for hidden costs, including homeowners insurance, property taxes, utilities and maintenance. We’ll walk you through the steps to establish your housing budget and help you make informed decisions so your dream home doesn't become a financial burden.

Your monthly budget must cover all homeownership costs, including mortgage principal and interest, homeowners insurance, property taxes, utilities, maintenance costs, and potentially homeowners association (HOA) fees.

The mortgage terms you are offered will affect your monthly payments for many years, and they will depend on your credit score and your debt-to-income ratio. Can you improve these before you apply for a mortgage? Lastly, do you have a down payment saved up? A 20% down payment will drastically reduce your monthly out-of-pocket costs on a mortgage.

A common guideline is to spend no more than 28% of your gross monthly income on total housing expenses and no more than 36% on paying your total monthly debts. Your total debt includes your mortgage and obligations like car loans, student loans, and credit card debts.

Your debt-to-income (DTI) ratio is a measure that mortgage lenders use to determine whether to qualify you for a loan and what loan terms to offer. The ratio shows your ability to pay your debts each month. If you have little debt and a high income, your debt-to-income ratio will be low, and you can easily take on more debt and still meet the payments. Lenders view a low DTI as more favorable.

How to Calculate Your Debt-to-Income Ratio

When calculating how much home you can afford, be aware that you will use your gross monthly income to establish your DTI. 

• Your gross monthly income is the amount of money you have earned before taxes and other deductions are taken out. 
• Your net monthly income is the amount you have earned after taxes and other deductions have been made.

Here’s how to calculate your debt-to-income ratio:

• Add up all your monthly debt payments. These might include payments for your rent or mortgage, as well as credit card balances, car loans and student loans.
• Divide them by your gross monthly income.

For example, if your monthly payments include $1,800 for your mortgage, $400 for a car loan, and $450 for other debts. Your monthly debt payments are $2,750. 

• $1,800 (mortgage) + $400 (car loan) + $450 (other debts) = $2,650 
• If your gross monthly income is $6,000, your debt-to-income ratio is 44%. 

A conventional loan typically requires a DTI of no more than 45%. Some lenders will accept a DTI as high as 50%, and most view a DTI of 36% as favorable.

Part of your monthly income should be allocated to savings, particularly for an emergency fund. Your emergency fund will help you avoid having to go into debt if you face unexpected financial expenses. Most experts recommend having three-to-six months’ worth of expenses in a savings account.

As a homeowner, you may face unexpected expenses with your home. Perhaps the air conditioning unit stops working, or you need a new roof. In these instances, building an emergency fund is critical so that you can pay your mortgage regardless of competing expenses.

Conventional loans, government-backed loans and fixed and adjustable-rate mortgages are the main types of mortgages available.

Conventional loans are the most popular mortgage type and suit borrowers with a good credit score and savings for a down payment. Conventional loans are either conforming or non-conforming.

• Conforming Loan: Meets Federal Housing Finance Agency (FHFA) standards and can be purchased by the government-sponsored agencies Fannie Mae and Freddie Mac.
• Non-conforming loan: This type of loan does not meet all of the FHFA standards and is riskier for the lender. A jumbo loan with a high loan amount is an example of a non-conforming loan.

Fixed-Rate Mortgages

Fixed-rate mortgage borrowers pay the same interest rate over the life of their loan (15 to 30 years), which means your monthly mortgage payment (the loan principal and interest) is the same each month. 

Adjustable-Rate Mortgages (ARM)

The interest rate for an adjustable-rate mortgage (ARM) changes over time. You might get a lower, fixed introductory rate for a set period, after which the rate changes, either up or down. When your rate goes up or down, your monthly mortgage payments go up or down, too.

While the government is not a lender, it does back some mortgages to make them more affordable to certain borrowers. Government-backed mortgages include Federal Housing Administration (FHA) loans, Veterans Affairs (VA) loans, and US Department of Agriculture (USDA) loans.

FHA loans require a credit score of 580 and a 3.5% down payment or a score as low as 500 with a 10% down payment. Most FHA loans require you to pay mortgage insurance premiums to cover the lender’s risk.

VA loans are guaranteed by the U.S. Department of Veterans Affairs (VA). They are available to eligible members of the U.S. military (active duty, veterans, National Guard and reservists) and their spouses. The VA does not set a minimum credit score requirement, but most lenders want borrowers to have a score of 620 or higher. There are no minimum down payment or mortgage insurance requirements, but a funding fee of 1.25% to 3.3% is due at closing.

USDA loans help low-income borrowers buy homes in eligible rural areas. There are no down payment or credit score requirements, though many lenders require a credit score of at least 620. but there are some guarantee fees.

Generally, the more you can offer as a down payment on a mortgage, the lower your mortgage rate will be. That’s partly because the amount you need to borrow will be less.

A conventional loan usually requires a minimum down payment of 3% to 5%, though you will avoid the cost of private mortgage insurance (PMI) with a 20% down payment. 

When you accept a mortgage loan, you will be responsible for closing costs and the down payment. Closing costs include origination fees, appraisal fees, attorney fees and escrow funds.

Borrowers who are preapproved for a mortgage loan tend to get better loan offers. Note that there are differences between prequalification and preapproval.

Prequalification is the initial step. The borrower provides information to the lender to estimate how large a loan they might qualify for. Preapproval is a commitment by the lender to grant the mortgage after a credit check and a review of the borrower’s financial situation.

There’s no shortage of online affordability calculators. Most let you input your down payment and an interest rate to estimate your monthly payments. While these calculators can be helpful as a guide, there are almost always additional hidden costs that must be considered.  

Homes.com strives to provide a more accurate estimate of your monthly mortgage payments with every home for sale. Each listing includes a payment calculator that is tailored to the home you’re viewing. The calculator estimates the cost of principal and interest, as well as property tax, home insurance and HOA fees, if applicable. 

A lender's criteria determines how much of a mortgage you qualify for. Your credit score, employment history, debt-to-income ratio, income and assets will be considered.

To be preapproved, you will complete a mortgage application. The lender will then perform an extensive credit and financial background check before preapproving a loan up to a specified amount and at a specific interest rate. You may be charged a fee for preapproval, and some lenders allow borrowers to lock in an interest rate as part of the process in case rates increase.

After you receive the conditional written commitment for an exact loan amount, you can look for homes at or below that price level. A preapproval puts you in a better position to negotiate with the seller because it proves you can secure the financing you need to close the deal.

Your mortgage preapproval will indicate how much you can borrow for a home. Still, you should allow room in your budget for additional homeowner expenses, such as property taxes, private mortgage insurance (if needed), utilities and maintenance.

Another consideration is long-term goals, such as retirement savings or education funds for your children. It’s worthwhile to work with a financial advisor and your real estate agent to develop a personalized homebuying strategy.

What is a good budget for buying a house? A good budget for buying a home fits the 28/36 rule, according to which you should not spend more than 28% of your gross monthly income on total housing expenses and no more than 36% on all debts, including housing costs.

How much should I spend on a house if I make $100k? A common rule of thumb when buying a home is to avoid spending more than three times your annual income. If you earn $100,000 each year, that would mean that you should not spend more than $300,000. However, the amount you spend will depend on your current financial situation, your debt-to-income ratio, and the cost of housing in your area.

How much should I spend on my house based on my salary? The 28/36 mortgage rule states that you should spend 28% or less of your monthly gross income on your mortgage payment (including principal, interest, taxes and insurance). To gauge how much you can afford using this rule, multiply your gross monthly income by 28%. For example, if you make $8,500 every month, you would multiply $8,500 by 0.28 to arrive at your suggested maximum mortgage payment of $2,380.