How much home can I afford?

By the third quarter of 2025, the tide seem­ingly began to turn in regard to a hous­ing mar­ket that had been marked by lim­ited invent­ory since the onset of the COVID-19 pan­demic in 2020. Accord­ing to mar­ket indic­at­ors from Red­fin, the National Asso­ci­ation of REALTORS® and Homes for Her­oes, by the sum­mer of 2025 things began to shift in regard to invent­ory (9.4 per­cent increase year-over-year). Prices also began to level off, as the median exist­ing home price in the United States was $435,300 in June 2025, which marked a 2 per­cent increase from the pre­vi­ous year. Price reduc­tions also became more com­mon com­pared to 2024, sig­nalling a cool­down in some seg­ments.

Although afford­ab­il­ity con­cerns still per­sist, many people may finally be ready to enter the home-buy­ing arena. When doing so, it’s essen­tial pro­spect­ive home buy­ers recog­nize how much they can com­fort­ably spend on a home. Most experts sug­gest buy­ers com­bine lender afford­ab­il­ity guidelines with an assess­ment of one’s per­sonal budget. These factors can help indi­vidu­als determ­ine a reli­able budget when shop­ping for homes.

• Debt-toin­come ratio: Lenders use vari­ous para­met­ers to identify a bor­rower’s cred­it­wor­thi­ness. That includes fig­ur­ing out a per­son’s debtto-income ratio (DTI). Wells Fargo says DTI can be cal­cu­lated by adding up all of a per­son’s monthly debt pay­ments and divid­ing them by gross monthly income. That num­ber is mul­ti­plied by 100 to get a per­cent­age. The lower the DTI, the less risky one is to lenders.

• The 28/36 rule: Part of the DTI equa­tion may include the 28/36 rule util­ized by many mort­gage lenders. This is a stand­ard guideline that can help one see if it’s pos­sible to afford a home loan. The 28 per­cent is allot­ted hous­ing costs. The monthly hous­ing expenses (prin­cipal, interest, taxes, homeown­ers insur­ance, private mort­gage insur­ance, and homeown­ers asso­ci­ation fees) should be no more than 28 per­cent of one’s gross monthly income. One’s total monthly debt pay­ments, includ­ing hous­ing, car, loans, stu­dent loans, and credit cards, should be no more than 36 per­cent of the gross monthly income. So if a pro­spect­ive home buyer earns $10,000 per month, or $120,000 per year, the hous­ing costs should not exceed $2,800. Total debt pay­ments, includ­ing hous­ing, should not exceed $3,600 per month.

• Per­sonal budget con­sid­er­a­tions: Lenders may allow bor­row­ers to bor­row a cer­tain amount of money, and buy­ers then go out and spend that much on a home. But to avoid liv­ing paycheck to paycheck and hav­ing all of one’s money go toward a home, it is best to account for per­sonal spend­ing habits and sav­ings goals. It’s import­ant to have an emer­gency funds account to pay for unex­pec­ted things like home repairs, or to account for instances when income may decline. Ongo­ing costs to man­age the home also merit con­sid­er­a­tion, as do util­it­ies and future renov­a­tions.

• Income-to-home price ratio: Some people abide by another gen­eral guideline to shop for a home that costs no more than three to five times their annual house­hold income. That means with an annual income of $100,000, one should aim for a home priced between $300,000 and $500,000. The spe­cific range will also depend on a per­son’s exist­ing debt.

• Interest rates and other factors: The interest rate on home mort­gages as well as down pay­ment also must be con­sidered. Resources like Bankrate and Zil­low provide home afford­ab­il­ity cal­cu­lat­ors that will factor in interest rates, terms of a loan, down pay­ment, and prop­erty taxes. Buy­ing a home when interest rates are high means spend­ing more over the life of the loan. Also, how much one puts toward a down pay­ment has a big impact. Aim­ing for 20 per­cent means avoid­ing pay­ing for private mort­gage insur­ance (PMI).

There is no fail-safe way to determ­ine how much home you can afford. Many factors are in play and are exclus­ive to buy­ers in the mar­ket for a new home.

Source: PressReader