Setting your budget: How much should you spend on a house?

Key takeaways 

• Home affordability depends on more than the mortgage payment — buyers need to account for taxes, insurance, maintenance and other ongoing costs.
• Lenders rely heavily on credit scores and debt‑to‑income ratios to determine loan eligibility and terms, making financial preparation critical.
• Preapproval shows how much you can borrow, but a realistic budget should also leave room for savings and long-term financial goals.

Buying a home is an exciting milestone, but it’s also a major financial commitment. Before falling in love with a property, it’s worth taking a step back to make sure the purchase fits comfortably within your budget — not just today, but over the long term.
A mortgage payment is only part of the picture. Homeowners also need to plan for ongoing expenses like property taxes, homeowners insurance, utilities and routine maintenance. Below, we break down how to set a realistic housing budget so you can move forward with confidence and enjoy your home without putting unnecessary stress on your finances.

A monthly housing budget is needed to account for all ownership costs, including mortgage principal and interest, insurance, property taxes, utilities, maintenance and possibly homeowners association fees.

Mortgage terms depend largely on a buyer’s credit score and debt‑to‑income ratio, which influence interest rates and monthly payments for years. Buyers who could improve their credit or reduce debt before applying often qualify for better terms. A larger down payment also reduces monthly costs, with 20% typically eliminating private mortgage insurance, or PMI.

A common guideline is limiting housing costs to no more than 28% of gross monthly income and total debt payments to no more than 36%. Total debt includes a mortgage as well as obligations such as car loans, student loans and credit cards.

Lenders rely on debt‑to‑income ratios to evaluate loan eligibility and terms. The calculation compares total monthly debt payments with gross monthly income. Lower ratios generally signal stronger financial health and are viewed more favorably by lenders.

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 $2,650. 

• $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.

Buyers also need to set aside part of their income for savings, particularly an emergency fund. Financial experts generally recommend keeping three to six months’ worth of expenses in reserve.

Homeownership often comes with unexpected costs, such as a broken air‑conditioning unit or a damaged roof. An emergency fund helps homeowners cover those expenses while continuing to make mortgage payments without taking on additional debt.

Homebuyers generally choose from conventional loans, government‑backed loans and fixed‑ or adjustable‑rate mortgages.

Conventional loans are the most common mortgage type and typically suit borrowers with strong credit and savings for a down payment. These loans fall into two categories:

• Conforming loans: Meet Federal Housing Finance Agency (FHFA) standards and can be purchased by Fannie Mae and Freddie Mac.
• Nonconforming loans: Do not meet FHFA standards and pose greater risk to lenders. Jumbo loans, which exceed conforming loan limits, fall into this category.

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.

In general, larger down payments lead to lower mortgage rates because borrowers finance less of the purchase price.

Conventional loans often require down payments as low as 3% to 5%, though putting down 20% eliminates private mortgage insurance (PMI). Buyers also pay closing costs, which may include origination fees, appraisals, legal 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.  

Each Homes.com 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.

Mortgage preapproval shows how much a buyer can borrow not necessarily how much they should spend. Buyers also need to budget for taxes, insurance, utilities, maintenance and long‑term goals such as retirement or education savings.

Working with a financial adviser and real estate agent can help buyers develop a sustainable homebuying plan.

This story was updated April 30.