A common rule of thumb says to spend no more than 3× your annual income on a home. But the real answer depends on your down payment, interest rate, existing debts, and what monthly payment actually fits your budget comfortably.
The 28/36 rule
Most lenders use two limits: your total housing costs (mortgage principal + interest + property tax + insurance) should not exceed 28% of your gross monthly income, and your total debt payments should not exceed 36%. If your gross income is $8,000/month, that means a maximum housing payment of $2,240 and total debts of $2,880.
How interest rates change what you can afford
At a 4% mortgage rate, a $400,000 loan has a monthly payment (P+I) of about $1,910. At 7%, the same loan costs $2,660/month. That's an $18,600 difference per year. Rising rates directly reduce how much home your income can support — even if nothing else changes.
What to include in your monthly payment estimate
- Principal and interest (P+I) — varies with loan amount and rate
- Property taxes — typically 0.5–2% of home value per year
- Homeowners insurance — roughly 0.5% of home value per year
- PMI (if down payment is under 20%) — around 0.5–1% of loan value per year
- HOA fees — where applicable
The down payment effect
A 20% down payment on a $400,000 home means an $80,000 down payment and a $320,000 mortgage. A 5% down payment means a $380,000 mortgage plus PMI. The larger down payment reduces monthly payments by around $280 and eliminates PMI — saving another $150–200/month.
Frequently Asked Questions
What annual income is needed to buy a $400,000 home?
Using the 28% front-end rule: a $400,000 home with 20% down ($320,000 loan at 7%) has a monthly P+I payment of roughly $2,130. Add taxes and insurance and the total housing cost is around $2,600/month. To keep housing at or below 28% of gross income, you'd need approximately $9,300/month ($111,000/year) in gross income.
Does a mortgage pre-approval mean I can afford the payment?
Pre-approval tells you what a lender is willing to lend — not what you can comfortably afford. Lenders calculate the maximum based on DTI ratios; they don't account for your lifestyle spending, savings goals, or retirement contributions. Always build your own budget first and compare it to the pre-approval number before committing.
Should I buy at the top of my approved range?
Generally no. Buying at the absolute limit leaves no buffer for property tax increases, maintenance costs (budget 1–2% of home value per year), unexpected repairs, or income disruption. A home that represents 25% of gross income rather than 28–30% gives significantly more financial flexibility and reduces stress when unexpected costs arise.
Check your affordability numbers
Use our Debt-to-Income Calculator to see how a new mortgage would affect your DTI, and our Closing Cost Calculator to estimate upfront costs.