How to Calculate How Much House You Can Afford
Start with gross monthly income, apply a target debt-to-income ceiling (commonly 36%) to find your maximum total monthly debt allowance, subtract existing debt payments to find your housing budget, then work backward through mortgage math — factoring in rate, term, tax, and insurance — to find the home price that budget supports.
The affordability calculation isn't one formula — it's several steps chained together, and understanding each step makes it much easier to see exactly which input to change if the resulting number doesn't fit your situation.
Step by step
First, find your gross monthly income (annual salary ÷ 12). Second, multiply by your target DTI ceiling — 36% is a common, moderate choice — to find your maximum total monthly debt payment allowed.
Third, subtract your existing monthly debts (car loan, student loans, credit cards) from that maximum, leaving your housing budget — the amount available for the mortgage payment plus tax, insurance, and HOA combined.
Fourth, work backward: subtract an estimate for tax, insurance, and HOA from the housing budget to isolate how much is left for principal and interest, then use that number, your down payment, interest rate, and loan term to solve for the maximum loan amount and home price it supports.
A worked example
At $80,000 annual income ($6,667/month), a 36% DTI ceiling allows $2,400 a month in total debt. Subtracting a $300 car payment leaves $2,100 for housing. After estimating roughly $300 a month for tax and insurance, about $1,800 remains for principal and interest — which, at a 6.5% rate over 30 years, supports a loan of roughly $284,000, plus whatever down payment is added on top for the final home price.