In short
Lenders cap the housing payment at about 28% of gross monthly income and all debt at 36% (43% to 50% in some programs), then back-solve the price from that budget. A $110,000 income with $600 of monthly debts and $60,000 down supports roughly $365,000 at 6.5% once property tax, insurance and PMI are included. Budget a further 2% to 5% of the price for closing costs, and remember that under 20% down means PMI, or lifetime MIP on an FHA loan.
“How much house can I afford?” has a lender’s answer and a personal answer, often $100,000 apart. This guide explains how US lenders size a mortgage from income and debts, what the down payment does to price and mortgage insurance, where the FHA route fits, and the cash needed on top of the down payment. By the end you will be able to reproduce the lender’s number and decide how far below it to sit.
Open the home affordability calculator →
The two debt-to-income ratios that set your budget
Lenders do not start with the house; they start with your gross (pre-tax) monthly income and apply two limits:
- Front-end ratio: the full housing payment (principal, interest, property tax, insurance, mortgage insurance and HOA dues) as a share of gross income. The conventional guideline is 28%.
- Back-end ratio: housing payment plus every other monthly debt (car loans, student loans, minimum card payments) as a share of gross income. The conventional guideline is 36%.
Your housing budget is the smaller of the two results. The 28/36 rule is a guideline rather than a legal cap: the qualified-mortgage reference point is 43%, Fannie Mae’s automated underwriting allows up to 50% with strong credit and reserves, and FHA uses 31/43 with up to 56.9% for borrowers with compensating factors.
| Standard | Front-end (housing) | Back-end (all debt) |
|---|---|---|
| Conventional guideline (28/36) | 28% | 36% |
| Qualified mortgage reference | — | 43% |
| Fannie Mae DU maximum | — | 50% |
| FHA standard | 31% | 43% |
| FHA with compensating factors | — | 56.9% |
Being approved at 43% or 50% does not mean you should borrow that much: those ratios are on gross income, and after federal tax, FICA and state tax a 43% back-end ratio can consume well over half of take-home pay.
From a monthly budget to a purchase price
Once the monthly budget is fixed, the price follows from the payment formula run backwards: find the loan whose principal and interest, plus tax, insurance and any PMI, equals the budget, then add your down payment. Every piece of the payment matters, so two buyers on identical incomes can afford very different prices depending on local property tax and PMI.
Worked example: $110,000 income, $600 of debts, $60,000 down
- Gross monthly income: $110,000 ÷ 12 = $9,166.67.
- Front-end limit: 28% × $9,166.67 = $2,566.67. Back-end limit: 36% × $9,166.67 − $600 = $2,700. Budget = the lower, $2,566.67.
- Solve for the price at 6.5% over 30 years with 1.1% property tax, $150 a month insurance and 0.6% PMI: about $365,000, a loan of roughly $305,200 at 83.6% loan-to-value.
- That payment breaks down as $1,929 principal and interest + $335 property tax + $150 insurance + $153 PMI = $2,567.
Raising the back-end limit to 43% lifts the budget to $3,341.67 and the price to about $465,000, but that payment is 36% of gross income and far more of take-home.
What the down payment changes
The down payment reduces the loan, sets the loan-to-value ratio (LTV), and at 20% or more removes private mortgage insurance. Below 20% on a conventional loan, PMI of roughly 0.2% to 2.25% of the loan a year, depending on credit score and LTV, is added to the monthly payment.
Under the Homeowners Protection Act you can ask for PMI to be cancelled once the balance reaches 80% of the original value, and it must end automatically at 78%. On a $400,000 home with 10% down ($360,000 loan) at 6.5%, PMI at 0.6% is $180 a month; the scheduled balance reaches 80% of the price after 95 payments, so you would pay about $17,100 of PMI before being able to cancel, unless appreciation or extra principal payments get you there sooner. The PMI calculator models both routes.
Conventional loans must also stay within the 2026 conforming limit of $832,750 for a one-unit home (up to $1,249,125 in high-cost counties); above that is jumbo territory.
The FHA option
FHA loans accept 3.5% down with a credit score of 580 or higher (10% below 580) and more lenient debt ratios, at the cost of mortgage insurance charged twice: an upfront premium of 1.75% of the loan, usually rolled into the balance, and an annual MIP of 0.55% for a 30-year loan with under 5% down (0.50% with 5% to 10% down, 0.70% to 0.75% on loans above $726,200). Unlike PMI, FHA annual MIP lasts for the life of the loan unless you put at least 10% down, in which case it ends after 11 years.
On a $350,000 home: 3.5% down is $12,250, the base loan is $337,750, upfront MIP adds $5,910.63 for a total loan of $343,660.63, and the first-year annual MIP is about $1,858, or $155 a month, on top of principal and interest of $2,116 at 6.25%. The 2026 FHA one-unit limit is $541,287 in most counties and up to $1,249,125 in high-cost areas. Compare both paths with the FHA loan calculator.
Closing costs: the cash on top of the down payment
Buyer closing costs typically run 2% to 5% of the price. They fall into four groups: lender fees (origination, appraisal, credit report), title and settlement (title insurance, settlement fee, recording, survey), transfer tax (0% in many states to over 2% in parts of New York, Pennsylvania and Delaware), and prepaids (a year of insurance, interest to month end, and a few months of property tax for escrow).
On a $450,000 home with 10% down, a 1% origination fee, 0.5% transfer tax and 1.1% property tax: origination $4,050, title insurance $2,250, fixed fees (appraisal $550, settlement $800, survey $450, inspection $450, recording $150, credit $50, flood certificate $25) $2,475, transfer tax $2,250, 15 days of prepaid interest $1,082, insurance $1,800 and three months of tax escrow $1,238. Total about $15,100, so cash to close is roughly $60,100 including the $45,000 down payment. Seller and lender credits reduce this one for one. The closing cost calculator itemizes it for your price and state.
Property tax and insurance inside the payment
Lenders collect property tax and insurance monthly in escrow, so they are part of the affordability test. Property tax averages about 0.9% of home value nationally but ranges from 0.27% in Hawaii to 2.11% in New Jersey and 2.01% in Illinois; Texas is 1.49%. The same $350,000 home costs about $5,670 a year ($473 a month) in Harris County, Texas, $6,055 in Cook County, Illinois and $1,540 in Maricopa County, Arizona. That $344 monthly gap between Harris and Maricopa is about $54,000 of borrowing capacity at 6.5% over 30 years. Look up your county with the property tax calculator, and build the full PITI payment with the mortgage payment calculator.
What people get wrong
- Budgeting on principal and interest alone. On the $400,000 example, P&I is $2,275 but the full payment with tax, insurance and PMI is $2,947, 30% more.
- Treating the approval amount as the budget. Lenders test gross income; your groceries come out of net income.
- Forgetting closing costs. A 10% down payment on $450,000 needs $60,000 of cash, not $45,000.
- Assuming FHA insurance drops off like PMI. With under 10% down it runs for the life of the loan; refinancing to conventional at 80% LTV is the usual exit.
- Ignoring local property tax. A 2% county versus a 0.5% county changes the affordable price by tens of thousands of dollars.
Frequently asked questions
How much house can I afford on $110,000 a year?
With $600 of monthly debts, $60,000 down, a 6.5% rate, 1.1% property tax and PMI, the 28/36 rule supports a price of about $365,000 and a payment of $2,567. Stretching to a 43% back-end ratio allows about $465,000.
What debt-to-income ratio do I need for a mortgage?
The conventional guideline is 28% of gross income for housing and 36% for all debts. Qualified mortgages reference 43%, Fannie Mae allows up to 50% with strong files, and FHA uses 31/43 with up to 56.9% with compensating factors.
Do I need 20% down to buy a house?
No. Conventional loans allow less with PMI, and FHA loans need 3.5% down with a 580 credit score. Twenty percent avoids mortgage insurance.
When can I cancel PMI?
You can request cancellation when the balance reaches 80% of the original value and it ends automatically at 78%. Most servicers also allow cancellation at 80% of a new appraisal after two years.
How much are closing costs on a $450,000 house?
Typically 2% to 5% of the price, $9,000 to $22,500. In the example above, with a 1% origination fee, 0.5% transfer tax and 12 months of insurance prepaid, the total is about $15,100.
Sources
- CFPB — What is a debt-to-income ratio?; Fannie Mae Selling Guide B3-6-02 — 28/36, 43%, 50% and FHA ratios, checked 8 October 2026.
- CFPB — When can I remove private mortgage insurance (PMI)? — 80% / 78% cancellation points, checked 8 October 2026.
- HUD Mortgagee Letter 2023-05 — Reduction of FHA annual MIP — upfront and annual MIP, checked 8 October 2026.
- FHFA — Conforming loan limit values for 2026; HUD — FHA announces 2026 loan limits — checked 8 October 2026.
- CFPB Loan Estimate / Closing Disclosure categories; ClosingCorp/CoreLogic market data — typical closing cost ranges, checked 27 October 2026.
- Tax Foundation — Property Taxes by State and County, 2026 (ACS 2020–2024) — effective property tax rates, checked 28 October 2026.