Buying a home is likely the biggest financial commitment you’ll ever make. Before you start looking at listings or walking through open houses, figure out how much house you can afford. That number keeps your search realistic, gives you more confidence when you make an offer, and helps you avoid taking on a payment that feels tight every month.
Start with the basics: your income, your debts, and what you can put down as a down payment. These three items determine how much a lender will be willing to lend you and what price range makes sense for you. Think of this as the foundation of your home buying plan.
Use Debt Service Ratios to Set a Budget
Lenders look at two main ratios to decide how much mortgage you qualify for:
- Gross Debt Service (GDS) ratio: your housing costs divided by your pre-tax income. Housing costs include your mortgage payment, property taxes, and heating. For qualifying purposes, this should not go over about 39% of your gross income.
- Total Debt Service (TDS) ratio: your housing costs plus all other debts (car loans, credit cards, lines of credit) divided by your gross income. This should not go over about 44%.
These aren’t arbitrary numbers. They are baked into how major lenders test your ability to pay. If either ratio is too high, lenders will cut the amount they are willing to lend you.
A rough rule of thumb is that your housing costs should stay well below these limits to give you breathing room. If your GDS is right at the max, you’re likely committing most of your income to housing. That’s risky if interest rates rise or if your income drops.
Factor in the Mortgage Stress Test
You have to qualify not just at today’s interest rate, but at a higher “qualifying rate.” Lenders use the greater of:
- the current qualifying rate set by regulators (around 5.25%), or
- your negotiated rate plus 2%.
In practice, that means the payment you qualify for may be based on a rate well above what you expect to pay. This reduces how much you can borrow. Don’t ignore this. It’s why many buyers qualify for less than they initially estimate.
Down Payment Matters
Your down payment affects how much you need to borrow. Most lenders require at least 5 % down on the first portion of the purchase price. If the home costs more, larger down payments are required as the price rises. In many cases, you’ll want 20 % down to avoid mortgage insurance.
The more you can put down, the lower your monthly payment will be for the same price house. In some cases, a lower purchase price with a bigger down payment can be a better choice than stretching to afford a bigger home.
Don’t Ignore Ongoing Costs
Affordability isn’t just the mortgage payment. You also need to budget for:
- Property taxes
- Heating and utilities
- Maintenance and repairs
- Insurance
- Potential condo fees
These add to your monthly costs and can push your debt service ratios higher. Many calculators don’t include maintenance or insurance, but you should. They matter.
Tools and Calculators Will Help
There are mortgage affordability calculators you can use online to plug in your real numbers and get a sense of what you might qualify for. Most take income, debts, down payment, interest rate, and housing costs into account. They won’t replace a pre-approval with a lender, but they give you a starting point.
Be Honest About Your Budget
There’s a big difference between “I can get approved for this” and “I can live comfortably with this payment.” If all your extra income is going toward the mortgage, you may end up house poor. That limits your ability to save, travel, handle emergencies, or change jobs. Think about your full budget, not just your mortgage payment.
