How Much House Can I Afford?

On an $80,000 salary using the 28% front-end rule: $80,000/12 = $6,667 monthly income × 0.28 = $1,867 max PITI. Subtract estimated taxes ($300), insurance ($100), and HOA ($0) = $1,467 for P&I. At 6.75% for 30 years, $1,467/month supports a ~$226,000 loan. With a $20,000 down payment, you could afford roughly $246,000. Exact numbers depend on your existing debts and the back-end (36%) constraint.

DTI (Debt-to-Income Ratio) is total monthly debt payments divided by gross monthly income. Two types: Front-end DTI = housing costs / income (max 28% conventional, 31% FHA). Back-end DTI = all debts including housing / income (max 36–43% conventional, 43–50% FHA). Lenders check both. Your loan is limited by whichever constraint is more restrictive. Strong credit, large down payment, and cash reserves can allow higher DTIs.

Rough calculation: $300,000 house with 10% down = $270,000 loan. At 6.75% / 30 years: $1,751/month P&I. Add taxes ($300) + insurance ($120) = $2,171 PITI. At 28% DTI: $2,171 / 0.28 = $7,754/month minimum gross income = $93,050/year. Back-end DTI of 36%: if you have $400/month in other debts, max total = $7,754 × 0.36 = $2,791, minus $400 = $2,391 for housing — this supports a slightly larger loan, so front-end is the binding constraint here.

PMI (Private Mortgage Insurance) is required when your down payment is less than 20% on a conventional loan. It protects the lender if you default. Cost: typically 0.5–1.5% of the loan amount annually, divided into monthly payments. On a $270,000 loan at 1%: $225/month. PMI is cancelable once you reach 20% equity (either through payments or appreciation). Request cancellation in writing when you hit 20%; lenders must cancel at 22%. FHA MIP works differently and may be permanent.

Most financial advisors say no — buy below your maximum. Reasons: Job loss, medical emergency, or income reduction is easier to handle with lower payments. Maintenance costs (1–2% of home value/year) need to be in your budget. You need money for furnishings, repairs, and improvements. The emotional stress of being 'house poor' (all income going to housing) is real. A common guideline: target a home at 2–3× your annual income, leaving room for other financial goals like retirement savings and an emergency fund.

The Canadian mortgage stress test requires qualifying at the higher of: the contract rate + 2%, OR 5.25% (the floor rate). So if your mortgage rate is 5.5%, you must qualify at 7.5%. This means your maximum home price in Canada is lower than in the US for the same income. The stress test was introduced in 2017 to ensure borrowers can handle rate increases. It applies to all insured mortgages and to uninsured mortgages at federally regulated lenders.

Minimum credit scores: FHA loan with 3.5% down: 580+. FHA with 10% down: 500–579. Conventional loan: typically 620+ minimum, but 740+ gets the best rates. VA loan: no official minimum, but lenders typically require 620+. USDA loan: 640+. For conventional loans, every 20 points of credit score can affect your rate by 0.125–0.25%, which translates to thousands of dollars over the loan term. A 760+ score gets the best conventional rates.

Closing costs typically run 2–5% of the loan amount. On a $270,000 loan: expect $5,400–$13,500. Major components: Lender fees (origination, points, underwriting), Title insurance (owner's + lender's policy), Escrow and settlement fees, Pre-paid items (first-year insurance, property tax escrow, prepaid interest), Government recording fees. You can sometimes negotiate seller concessions to cover closing costs, or roll them into the loan with some programs (VA allows financing of the funding fee). Shop multiple lenders — fees vary significantly.

Beyond the down payment, budget for: Closing costs (2–5% of loan), Emergency fund (3–6 months of housing expenses), Moving costs ($1,000–$5,000+), Initial repairs and improvements, New appliances and furniture. A useful target: have your down payment + 5% of home price in savings at closing. For a $300,000 home with 10% down: $30,000 down + $15,000 buffer = $45,000 saved before closing. Don't drain your emergency fund for the down payment.

FHA loans are government-insured mortgages backed by the Federal Housing Administration. Key features: 3.5% minimum down payment (with 580+ credit score), 10% down accepted with 500–579 credit score, Less strict DTI requirements (up to 43–50%), Lower credit score minimums than conventional loans. Trade-offs: Mortgage Insurance Premium (MIP) required regardless of down payment — 1.75% upfront + 0.55–0.85% annually. If down payment < 10%, MIP is permanent. For borrowers with good credit and 20% down, conventional is usually cheaper. FHA is best for first-time buyers with limited savings or lower credit.