How much house can I afford on $85,000 a year?

The two limits lenders look at

Most lenders compare your monthly payments with your gross (before-tax) monthly income. A long-standing guideline is 28/36: the housing payment, meaning principal, interest, property tax and insurance, should stay under 28% of income, and all debt payments together, including the new housing payment, under 36%. Many loan programs allow more, but these two ratios are a sensible starting point and explain how the answer is built.

The worked example

Income is $85,000 a year, $7,083.33 a month. Other debts (a car payment and a student loan) come to $400 a month. The buyer has $40,000 for a down payment, and the quote is a 30-year fixed loan at 6.75%, with property tax of 1.1% of the price a year and $1,600 a year of insurance.

The housing limit is 28% of $7,083.33, which is $1,983.33. The all-debts limit is 36%, $2,550, minus the $400 of other debts: $2,150. The lower one, $1,983.33, applies.

That $1,983.33 has to cover four things: $133.33 of insurance, property tax that depends on the price, and principal and interest. Solving them together gives a loan of $244,957 and a home price of about $284,957, with $1,588.79 of principal and interest and $261.21 of tax each month.

What changes the answer

Debts: with $1,200 a month of other debts instead of $400, the all-debts limit falls to $1,350 and becomes the one that binds. The price drops to about $199,402, more than $85,000 less. Paying off a car loan before applying can raise the price you qualify for more than a bigger down payment would.

The rate: at 5.75% instead of 6.75% the same $1,983.33 supports a price of about $308,547, roughly $23,600 more.

The down payment adds to the price dollar for dollar, and a larger one can also remove mortgage insurance, which this example leaves out.

Affordable is not the same as comfortable

The ratios ignore childcare, commuting, retirement saving and repairs, which run around 1% of a home's value a year. Many buyers aim below the limit so a job change or a rate rise on other debts does not hurt. Try a lower housing limit, for example 25%, in the home affordability calculator and compare.

Outside the United States

Other countries cap the same thing in different ways. South Korea applies a debt-service ratio (DSR) of 40% to all loan repayments, and Brazilian banks commonly keep the installment under 30% of income. Set both limits to your country's figure to get a comparable estimate, and remember a lender also looks at your credit history, savings and the property itself.

Costs the ratios leave out

Buying also costs money up front. Closing costs (lender fees, title, appraisal, transfer taxes) often add 2% to 5% of the price, and they come out of the same savings as the down payment. Mortgage insurance applies when the down payment is under 20% of the price, as it is in this example (about 14%); it adds to the monthly payment until the loan falls to 80% of the home's value. Homeowners association fees, where they exist, count toward the housing ratio too. Add them in the home affordability calculator by lowering the housing limit or raising the insurance figure.

In short

Lenders' ratios give the most you can borrow, not the most you should. Work out both limits, take the lower one, and solve for the price with tax and insurance included. Then lower the housing share until the payment leaves room for saving, repairs and the rest of life, and check how debts and the rate change the answer before you start viewing homes. Paying down a car loan or a card before you apply often helps more than a slightly larger down payment.