How much house can I afford? Debt-to-income ratios explained
“How much house can I afford?” usually gets answered with a number from a lender’s website, delivered with no explanation. This guide is the explanation. It shows how lenders turn your income and debts into a price ceiling, then works through three buyers with identical incomes but different debts to show how much your existing obligations matter.
The two ratios lenders look at
Almost every mortgage decision starts with two fractions, both measured against your gross (before-tax) monthly income:
- The front-end ratio — your total monthly housing cost divided by income. Housing cost means principal and interest, property tax, homeowners insurance and any HOA dues. The traditional limit is 28%.
- The back-end ratio, usually called debt-to-income (DTI) — housing cost plus every other monthly debt payment (car loans, student loans, minimum card payments), divided by income. The traditional limit is 36%.
These 28/36 figures are guidelines, not laws. Many conventional lenders will approve a DTI of 43% or higher, particularly with strong credit and savings, and some government-backed programs allow more. Think of 28/36 as the “comfortable” zone and 43% as roughly where the door starts to close.
Turning the ratios into a price
Take a household earning $120,000 a year: $10,000 a month. The ceilings are:
- 28% of $10,000 = $2,800 for housing.
- 36% of $10,000 = $3,600 for housing plus all other debt.
Whichever limit bites first sets the budget. To convert that monthly budget into a price, assume a 6.5% rate on a 30-year loan, 20% down, property tax of 1.1% of the price a year and $2,000 a year of insurance ($167 a month). Each dollar of home price then costs about 0.6 cents a month in housing: the principal and interest on the 80% that is borrowed, plus the property tax.
Buyer A: modest debts
Buyer A has $750 a month in other debts: a car loan and a student loan. The back-end limit leaves $3,600 − $750 = $2,850 for housing, but the front-end limit is only $2,800, so the front-end ratio is the binding one. After insurance ($167), that leaves about $2,633 for principal, interest and tax, which supports a price of about $440,900.
Check it: the loan is $352,700, principal and interest are about $2,229, tax is about $404 and insurance $167 — $2,800 in total. The buyer would also need about $88,200 down plus roughly $13,200 in closing costs (3%), or $101,400 in cash.
Buyer B: heavier debts
Buyer B earns the same but carries $1,400 a month of other debt. Now the back-end limit leaves only $3,600 − $1,400 = $2,200 for housing, below the front-end figure. The same arithmetic gives a price ceiling of about $340,400. Same salary, same rate, same down payment percentage, and $100,000 less house.
Buyer C: pays off the car first
Suppose Buyer B clears $1,250 of monthly debt payments — say, a car loan and a credit card — leaving $150 a month. The back-end limit stops binding, the 28% front-end ceiling takes over, and the price ceiling goes back to about $440,900. Eliminating $1,250 of monthly payments raised the buying power by about $100,000, which makes clearing debt before you apply one of the best-value moves in home buying.
| Other monthly debt | Binding limit | Housing budget | Approx. price ceiling | |
|---|---|---|---|---|
| Buyer A | $750 | Front-end (28%) | $2,800 | $440,900 |
| Buyer B | $1,400 | Back-end (36%) | $2,200 | $340,400 |
| Buyer C | $150 | Front-end (28%) | $2,800 | $440,900 |
What the interest rate does
For Buyer A, hold everything constant and change only the rate. At 5.5% the ceiling rises to about $482,400; at 6.5% it is about $440,900; at 7.5% it falls to about $404,500. A two-point swing in the rate is worth nearly $78,000 of house, which is why rate shopping and (where sensible) points deserve real attention.
Other levers for the same buyer
Rates are not the only dial. Keeping Buyer A’s $2,800 housing budget fixed, here is how the price ceiling moves when one other assumption changes:
- Property tax at 2.0% of value instead of 1.1% (common in some regions): about $391,700. At 0.6%, the ceiling rises to roughly $473,900. Two houses with the same sticker price can carry very different monthly bills.
- A 15-year loan at 6.0% instead of a 30-year loan at 6.5%: about $343,400. The payment per dollar borrowed is far higher, so the same budget buys much less house in exchange for building equity faster.
- 30% down instead of 20%: about $493,000 — but only if the cash exists. That home would need roughly $148,000 down plus about $14,800 in closing costs.
- 10% down (ignoring mortgage insurance): about $398,700, and the real figure is lower once insurance is added.
The takeaway is that “how much house” is not one number. It is a range that moves with taxes, loan structure and cash, and the useful skill is knowing which assumption is doing the work.
The cash side: down payment and closing costs
An approval on income does not pay for the house. A buyer needs the down payment, plus closing costs that typically run 2–5% of the price, plus moving costs, plus a repair cushion. With less than 20% down, private mortgage insurance usually applies, adding to the monthly cost. The Mortgage Affordability Calculator checks your savings against the cash needed so that a pre-approval does not set you up to be short at closing.
Why “I can be approved for more” is a trap
Lenders measure the ratios against gross income, which includes the part that goes to tax, retirement contributions and health insurance. A payment that is 28% of gross income can easily be 35% or more of take-home pay. And the ratios leave out costs that come with every house:
- Maintenance: a common rule of thumb is about 1% of the home’s value per year.
- Utilities and upkeep usually exceed what renters pay.
- Rising taxes and insurance mean your payment can creep up even with a fixed-rate loan.
A better habit is to set your own limit, below the lender’s, based on your take-home pay and what you want to keep funding: retirement savings, an emergency fund, travel. Consider what the payment would feel like if income dropped 15%.
A five-step way to find your number
- Add up your gross monthly income and every recurring debt payment.
- Compute 28% of income for housing and 36% of income minus other debts for the back-end limit; take the lower one.
- Subtract tax, insurance and HOA from that budget to see what is left for principal and interest.
- Use the Mortgage Calculator to work backwards to a price, or enter a target price in the Mortgage Affordability Calculator and read the verdict.
- Check that your savings cover the down payment plus about 3% closing costs, with a cushion left over.
The figures above use one set of assumptions for rate, taxes and insurance; yours will differ, and local property tax rates alone can change a ceiling by tens of thousands of dollars.
Keep reading
- Debt snowball vs. debt avalanche: which pays off faster? — One set of three debts, paid two ways, compared in months and dollars — plus the case where the order matters a lot.
- How a GIC ladder works in Canada, with a five-rung example — A $30,000 ladder built rung by rung, with the interest arithmetic, the price of flexibility and the CDIC limit.
- Start early or contribute more later? What the compounding math says — Emma invests for ten years and stops. Liam invests for thirty. The result depends on the rate, and on whether Liam can contribute more.
This guide is general educational information, not financial, tax or legal advice. Example figures are illustrations computed from the stated assumptions; your results will differ.