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Buying a home is one of the biggest financial decisions you may ever make, and it’s easy to get overwhelmed when considering your options. To help narrow your choices and understand what you can truly afford, pay attention to three key numbers: your monthly income, your expected housing payment, and the difference between those two amounts.
Learn how each number works, why it’s important to compare them, and how to use this knowledge to avoid common homebuying mistakes.
Key Takeaways
- Your gross monthly income is the starting point for understanding how much house you can actually afford.
- Housing costs that exceed 30% of your income may cause significant financial strain.
- Estimating your full monthly payment, including PITI, gives you a clearer view of what kind of home you can afford long-term.
The Three Numbers
Before you start house hunting, it helps to know three numbers: your monthly gross income, your estimated monthly housing payment, and the difference between those amounts. These figures can help you understand what’s truly affordable—and what might stretch your budget too far.
Your Monthly Gross Income
Your gross monthly income is your total earnings before taxes and deductions. This number is the starting point most lenders use to determine how much house you can afford.
Gross monthly income can include income from wages, freelance work, side gigs, interest and dividends, or any other earnings. Lenders base affordability decisions on this gross figure, not your take-home pay.
Your Monthly House Payment
Your monthly housing cost is more than just your mortgage. Lenders use a total called PITI, an acronym that represents the typical parts that make up a mortgage payment: principal, interest, taxes, and insurance.
This total may vary widely based on your location, interest rate, and insurance premiums. You may also need to include private mortgage insurance (PMI) and homeowners association (HOA) fees.
Warning
If your housing costs push past 30% of your income, you may have less room for savings, debt payments, or emergencies.
These costs can add up quickly, so it’s important to estimate your full monthly payment, not just the mortgage. Be sure to factor in property taxes and insurance for accuracy. Financial planners often recommend that your monthly debt-to-income ratio be at or below 43%.
The Ratio Between Them
For decades, housing agencies and lenders have used the benchmark that your total housing costs should not exceed 30% of your gross monthly income.
According to the Harvard Joint Center for Housing Studies, “in the early 1980s, new legislation increased the standard to 30% [from 25%] for most programs. Since then, the 30% of income measure has been the norm for defining housing affordability.”
While the 30% rule is still a common benchmark, many households exceed it. Recent Investopedia analysis shows that of buyers who put 20% down on a median-priced home they’re now spending around 34.73% of their gross income on housing.
A Tale of Two Homeowners
Imagine two households living in Colorado, earning different incomes but paying the same amount for housing. In 2024, the average monthly mortgage payment in the state was $2,670.77, according to Rocket Mortgage. For simplicity, let’s round that to $2,600.
The formula for finding your home affordability ratio is:
(Monthly Housing Costs / Gross Monthly Income) × 100
Household A earns $120,000 per year, or $10,000 a month before taxes. Their $2,600 mortgage payment equals 26% of their gross income. This is within the commonly recommended limit.
Household B earns $75,000 per year, or $6,250 a month. However, the same $2,600 payment eats up nearly 42% of their gross income, well above the affordability threshold.
Even though both households are buying similar homes, their financial experiences will be very different. Affordability isn’t about the home price alone, it’s about how the payment compares to your income.
Note
The same mortgage can be manageable for one buyer and financially risky for another, depending on their income.
The Bottom Line
Understanding your monthly gross income and total housing costs helps you avoid buying more house than you can comfortably afford. And while the 30% rule isn’t a hard limit, it does offer a useful reality check when you’re buying a home.
Use affordability calculators that include PITI, PMI, and HOA fees to get a realistic estimate of your monthly payments. Taking time now to run these numbers can help protect your budget and your future finances.
