How Much Home Can I Afford?

Buying a new home is exciting, but it should also provide you with a sense of stability and financial security. In order to avoid buying a house you can’t afford, you’ll need to figure out a housing budget that makes sense for you. After all, living month to month with just enough income to cover expenses can be stressful. 

While the calculator above can help you do that, here’s a look at everything you need to know about setting a budget when buying a home.

A financial advisor can aid you in planning for the purchase of a home. To find a financial advisor who serves your area, try SmartAsset's free online matching tool.

Factors That Impact How Much You Can Afford

How much you can afford to spend on a home depends on more than just the listing price. A range of financial and market factors—some within your control and others not—can shape your homebuying budget.

• Income: Your income is a key determinant of how much you can afford to spend on a home. Lenders measure your existing debt payments as a percentage of your income to determine how much you can afford to pay each month for a mortgage. 
• Credit score: This number, which can range from 300 to 850, indicates how likely you are to pay back a loan on time. The higher your credit score, the more attractive you are to lenders. 
• Existing debt: Existing debt limits your capacity to take on additional debt, like a mortgage. The more debt you carry, the less you’ll likely be eligible to borrow and spend on a home. 
• Down payment and savings: A large down payment can lead to a smaller loan value and lower monthly payments. A small down payment means borrowing more, which raises your monthly mortgage cost.
• Mortgage term: The length of a mortgage has a direct impact on how much you can afford to spend on a home. While a 30-year fixed mortgage often results in lower monthly payments, a 15-year mortgage runs for half as long and may save you considerably in the long run. 
• Property taxes: Real estate taxes paid to a local authority like a city or county are often rolled into your mortgage payment. Buying a home in an area with high property taxes may lead to a higher monthly payment. 
• Homeowner’s insurance: Like property taxes, your homeowner’s insurance policy is included in your monthly payment. This insurance protects you in the event of fire, theft, accidents and other events. 
• Current interest rates: Mortgage rates have a direct impact on your monthly payment and how much cumulative interest you’ll pay.
• Private mortgage insurance: This charge, known as “PMI,” typically applies to conventional mortgages when the down payment is less than 20%. PMI generally ranges from 0.5% to 1.5% of the loan amount per year, increasing the monthly payment. 
• Local real estate market: Prices and activity in the local market will dictate, at least in part, how much you end up paying for a home. 

Setting a Budget: How Much Home Can You Afford? 

When determining how much you can afford to spend on a home, calculating your debt-to-income (DTI) ratio is an important first step. This ratio is the total of all monthly debt payments—including your mortgage—divided by your gross monthly income. For example, if you have $5,000 in monthly income and pay $1,000 in monthly debt payments, your DTI ratio is 20%. 

The 36% Rule

While some lenders may accept DTI ratios of up to 43% (and sometimes higher), they typically prefer your DTI to be below 36%. This is known as the 36% rule, and it’s what the home affordability calculator above is based on. 

Lenders often use a more specific variation of this rule to evaluate a borrower’s capacity to take on debt. This version, known as the 28/36 rule, restricts your monthly mortgage payment to 28% of your gross income, with total debt payments not exceeding 36%. 

How Debt Impacts Your Housing Budget

For example, imagine a person who earns $8,000 in monthly income ($96,000 per year). However, they recently purchased a new car and now pay $700 per month for it (The average monthly payment in the fourth quarter of 2024 was $742, according to Experian.) Meanwhile, the same person also pays $500 per month in student loans. (For context, the average monthly payment is $536, according to the Education Data Initiative.) 

So with $1,200 in monthly debt payments, how much could they afford to spend on a home? Using the 36% rule, this prospective buyer would only be able to afford a $1,680 monthly payment. With a 20% down payment, they could buy a $359,000 home. 

(This table shows how much people with varying incomes can afford to spend on a home in Kansas City, Missouri, using the 36% rule. These figures assume the buyer already pays $1,200 per month toward existing debts. The maximum monthly mortgage payments are for a 30-year fixed mortgage, a 20% down payment, excellent credit (760+) and annual homeowner’s insurance equal to 0.50% of the purchase price. Lastly, we calculated these figures using an annual percentage rate of 2.866%.)

Monthly debt payments can significantly limit what you can afford to spend on a home. A person who earns $48,000 per year before taxes can only afford a $240 monthly mortgage, which is simply unrealistic in 2025. Even someone with an annual salary of $120,000 can only afford a mortgage payment of $2,400 per month, which means they’re limited to homes listed for under $515,000. 

Buying a Home When You’re Debt-Free

This underscores the value of getting out of debt before buying a home. In the examples above, paying off existing debt would free up an additional $1,200 per month to put toward housing expenses.  

For example, the same person who earns $48,000 per year would see their monthly budget rise to $1,440. That means they could potentially afford a $300,000 home (assuming they make a 20% down payment).

Meanwhile, the same person with $120,000 in annual income could potentially afford to spend up to $665,000 on a home that costs $3,600 per month. 

This table shows how much people with varying incomes can afford to spend on a home in Kansas City, Missouri, using the 36% rule. The figures assume the hypothetical homebuyer who has no existing debt. The maximum monthly mortgage payments are based on a 30-year fixed mortgage with a 20% down payment, excellent credit (760+) and annual homeowner’s insurance equal to 0.50% of the purchase price. Lastly, the calculations were done using an annual percentage rate of 2.866% or 4.384%.

Consider Your Other Financial Commitments 

Keep in mind that the 36% rule sets an upper limit on how much of your income you should devote to a mortgage. That doesn’t mean you should automatically spend that much. 

Consider your other financial commitments and priorities. Overspending on a home may reduce what you can save for retirement, college, travel and other priorities.

How Much Should I Have Saved When Buying a Home?

While your DTI ratio helps determine your monthly mortgage budget, your down payment directly affects how much you need to borrow. The more money you put down, the smaller the loan. 

According to the National Association of Realtors, the median down payment in 2025 is around 15%. However, a 20% down payment is a better target. Putting down 20% not only reduces the size of your loan but also lets you avoid private mortgage insurance (PMI)—a monthly charge added to your mortgage when your down payment is under 20%. PMI typically remains in place until your home equity reaches 80%, or 78% in some cases.

Closing Costs

Your down payment isn’t the only cash you’ll need to purchase a home. Closing costs are the fees you’ll need to pay to finalize your purchase. These expenses include title insurance, attorney fees, home inspection fees, as well as loan origination fees. Closing costs typically range from 2% to 5% of the loan amount. SmartAsset’s Closing Costs Calculator can help you estimate how much they could be for you.

Cash Reserves

Lenders generally want to know you will have a cash reserve remaining after you’ve purchased your home and moved in, so you don’t want to empty your savings account on a down payment.

Having some money in the bank after you buy is a great way to help ensure that you’re not in danger of default and foreclosure. It’s the buffer that shows mortgage lenders you can cover upcoming mortgage payments even if your financial situation changes.

While maintaining a DTI ratio under 36% protects you from minor changes in your finances, a cash reserve protects against major ones.

At a minimum, it’s a good idea to be able to make three months’ worth of housing payments out of your reserve, but something like six months would be even better. That way, if you experience a loss of income and need to find a new job, you have a financial cushion to continue making your monthly payments. 

Our home affordability calculator above crunches these numbers for you and estimates how much cash you should have for a down payment, closing costs and reserves. Using the home values from the second table above, here’s a look at how much cash those hypothetical buyers should aim for:

What Type of Mortgage Should I Get?

The type of mortgage you get can also impact your total budget and the size of your monthly payment. Mortgages can have fixed or variable interest rates, and a range of requirements based on whether the lender is a private company or government agency. 

Fixed-Rate Loan

A fixed-rate mortgage has an interest rate that remains the same for the entire term of the loan. Fixed-rate mortgages typically run for 30 or 15 years, although some lenders may offer different length terms, including 20-year mortgages. Fixed-rate loans offer the most predictable and stable payments, allowing homeowners to budget more accurately. 

Adjustable-Rate-Loan

An adjustable-rate mortgage or ARM is the counterpart to fixed-rate loan. Instead of remaining static for the duration of the mortgage, an ARM’s interest rate changes periodically. These loans start with a low fixed rate for a few years, then adjust annually within set limits. There are a variety of adjustable-rate mortgages. For example, a 7/1 ARM has an interest rate that remains fixed for the first seven years and then adjusts each after that. 

ARMs often start with low interest rates, but adjustments can significantly raise your monthly payments.  

FHA Loan

Federal Housing Administration (FHA) loans are a type of government-backed mortgage with lower down payment and credit score requirements compared to some conventional loans. This helps first-time buyers and those with less savings or lower credit become homeowners. 

FHA loans require a 3.5% down payment and a credit score of 580 or higher. Borrowers with lower credit scores (500–579) can also qualify for an FHA loan, but will need a 10% down payment. 

USDA Loan

Like FHA loans, U.S. Department of Agriculture (USDA) mortgages are backed by the federal government. USDA loans aim to help low- and moderate-income homebuyers. However, unlike FHA loans, USDA loans do not require a down payment. But USDA mortgages can only be used to purchase properties within designated rural areas. The borrower also has to meet specific income requirements. 

VA Loan

A VA loan is a type of mortgage that helps eligible veterans and active-duty service members purchase homes. Backed by the U.S. Department of Veterans Affairs, these loans do not require a down payment or private mortgage insurance. However, borrowers typically pay a one-time funding fee to help offset the cost of the program. 

Jumbo loan

Jumbo loans are mortgages that go beyond the maximum loan amounts established by the Federal Housing Finance Agency (FHFA). For most counties in the U.S. in 2025, that cap is set at $806,500 and $1,209,750 in designated high-cost areas. Any mortgage that surpasses this limit falls into the jumbo category and isn't eligible for backing from Fannie Mae or Freddie Mac. 

Tips to Increase Your Budget

• Paying off existing debt can improve your debt-to-income ratio, enabling you to qualify for a larger mortgage. Additionally, a higher income raises your borrowing capacity and may help you handle a larger monthly payment. 
• A stronger credit score may qualify you for better mortgage rates, making a higher-priced home more affordable. Here are 10 tips to help you get an 800 credit score.
• Consider buying in an area with lower taxes. Focusing your home search in an area with  lower property taxes can reduce your monthly housing expenses. SmartAsset’s Mortgage and Property Tax calculators can estimate what you could pay in local taxes. 
• A financial advisor can help you save and invest with the goal of eventually buying a more expensive home. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.