Chapter 3: What you can actually afford
On the same $90,000 income, a lender's letter will happily tell Jamie "up to $480,000," and Jamie's own budget says about $360,000. Both numbers are correct. They are answers to different questions. The lender is answering "how much can we let this person borrow before our risk models complain." Your budget answers "how much house can I carry while still saving, traveling, fixing teeth, and sleeping." This chapter exists because most buyers only ever hear the first answer, and the $120,000 between the two is where house-poor lives.
How a lender sizes you
Lenders measure you with the DTI, your debt-to-income ratio: monthly debt payments divided by gross monthly income. Gross income is pay before taxes, which already makes the ratio more generous than it sounds, since nobody pays a mortgage with pre-tax dollars. The textbook screen is the 28/36 rule: housing costs up to 28% of gross, and housing plus all other debt payments up to 36%.
What counts as debt: minimum payments on credit cards, car loans, student loans, personal loans, and obligations like child support. What does not count: utilities, groceries, phone plans, gym memberships, daycare, or your retirement contributions. The lender's housing number is PITI: principal, interest, property taxes, and insurance, plus PMI (private mortgage insurance, required below 20% down, detailed in Chapter 4) and any HOA dues. Maintenance appears nowhere in any lender formula, which becomes important shortly.
Now the part the textbook leaves out. The 28/36 rule describes a conservative loan from a careful decade. Modern automated underwriting routinely approves total DTIs of 43–50% for borrowers with strong credit and some reserves. The approval letter you receive is built near that stretched ceiling, because lenders are paid to lend. The Personal Finance Guide, Chapter 20 said it once and this guide will keep saying it: qualification is not affordability, and the letter is a ceiling, not a target.
Trace Jamie's letter. Gross income $7,500 a month, zero monthly debts, credit score positioned, so the automated system stretches to roughly 46% of gross: about $3,450 a month for PITI plus PMI. At 6.55% with 10% down, that carries a $480,000 house: a $432,000 loan costs $2,745 in principal and interest, taxes and insurance run about $560 (using a typical 1.4% of price per year), and PMI adds about $144. Total: $3,449. The letter prints $480,000, and every listing site Jamie opens will now happily show $480,000 houses. One more wrinkle worth knowing: debts eat the same ceiling. A $450 car payment would shrink that approval by about $60,000 of price.
The Finvest budget method
Run the question from the other end, starting from your actual life instead of your gross pay. The method takes four steps:
- Find your real monthly surplus. The number left after rent, spending, and the saving you refuse to stop (the Personal Finance Guide, Chapter 2 builds this). For Jamie: $5,450 take-home, $2,200 rent, $2,540 of everything else, $710 of surplus going to the house fund.
- Set your housing capacity. Current rent plus the surplus you are willing to redirect once the house fund has done its job. Jamie: $2,200 + $710 = $2,910 a month. Retirement contributions keep running through payroll, untouched, and the reserve stays full. That is the whole point of building the number this way.
- Make that capacity cover everything. All of PITI, PMI, and the maintenance the lender ignores: about 1% of the home's value a year.
- Convert the payment to a price. At 6.55% with 10% down, each $100,000 of price costs about $802 a month all-in: $572 of principal and interest, $117 of taxes and insurance, $30 of PMI, and $83 of maintenance set aside. Divide: $2,910 ÷ $802 ≈ 3.6, so Jamie's budget carries about $360,000 of house.
The conversion factor is the useful tool here, because it makes any price instantly testable. A $500,000 listing? About $4,010 a month, all-in. Your numbers will differ with your tax rate, your down payment, and this week's rates, so run your own:
Put Jamie's two answers side by side. Same income, same month, same rate.
$3,449/mo of PITI and PMI, 46% of gross pay. After taxes and the $333 maintenance reality, Jamie's $5,450 take-home keeps about $1,670 for food, car, travel, and every emergency. The surplus is gone and the savings rate is zero.
$2,886/mo all-in, built from rent plus redirected surplus. Retirement contributions keep running, the reserve stays intact, and life continues at its current shape. The payment fits the budget instead of replacing it.
The hidden 30%
Listing sites and approval letters train you to think in principal and interest, and principal and interest is only about 70% of the bill. On a $400,000 house with 10% down, the loan payment is $2,287, and the true monthly cost is $3,207 once property taxes ($367), insurance ($100), PMI ($120), and the 1% maintenance fund ($333) join in. Those extras total $920 a month, almost 30% of the real cost, and not one of them appears on the mortgage calculator the listing site shows you. The extras also grow on their own schedule: insurance premiums have been rising across much of the country, and many states reassess property taxes after a sale, so expect the stack to step up in year two (Chapter 12 decodes the escrow letter that announces it).
Price a house by its all-in monthly cost: principal, interest, taxes, insurance, PMI, HOA, and 1% a year for maintenance. If that number forces your savings rate to zero, the house costs too much, whatever the letter says.
Three stress tests before you commit
A budget that only works on a sunny day is a forecast, and Chapter 1 covered how forecasts behave. Before locking a price ceiling, push on it three ways:
- Rate +1%. Quotes drift between pre-approval and lock. At 7.55%, Jamie's $360,000 loan costs $2,529 instead of $2,287, a $242 jump. If +1% breaks the budget, the price ceiling is too high.
- Three lean months. A job gap or an unpaid leave: three months of Jamie's $3,207 all-in cost is about $9,600. The reserve must cover it after closing, which is why Chapter 1 made reserves-after-closing a scorecard line.
- A $5,000 first-year surprise. Sewer line, HVAC, the roof's last winter. The maintenance fund plus reserve should absorb it without a credit card. First-year surprises are the rule, not the exception: sellers defer exactly the repairs you inherit.
Jamie ran both numbers and split the difference deliberately. The letter said $480,000; the budget said $360,000; the neighborhoods Jamie actually wants cluster between $380,000 and $420,000. So Jamie set a hard ceiling of $400,000, where the all-in cost is $3,207, about $300 over the comfortable line, and then closed the gap before shopping instead of hoping: $180 trimmed from travel, $120 from dining out, both chosen in the budget review, not discovered in a crisis. For three months Jamie paid the difference into savings, living on the future house budget while still renting. The payment passed the test drive, the stress tests passed at $400,000, and the listing-site filter now stops at $400,000 no matter what the letter whispers. Chapters 7 and 11 pick up Jamie's purchase from here.
Get pre-approved to learn your ceiling, then set your own number from your surplus and stress tests, and shop strictly below it. The strongest position in a negotiation is a buyer who already knows their walk-away price.
Where people go wrong
- Shopping at the top of the letter. The lender stretched to 46% of gross; nobody who did that calls it comfortable at tax time, daycare time, or transmission time.
- Budgeting the loan payment instead of the stack. The hidden 30% (taxes, insurance, PMI, maintenance) turns a "fits perfectly" payment into a slow squeeze.
- Skipping the trial run. Jamie's three-month test drive costs nothing and catches an overreach while the fix is still a filter setting, not a refinance.
- Letting the down payment set the price. Having $48,000 saved does not mean buying a $480,000 house; Chapter 4 shows why a smaller price with a thicker cushion usually wins.
Key takeaways
- Lenders size you by DTI on gross income: 28/36 in the textbook, stretched to 43–50% in real approvals. On Jamie's $90,000, that prints a $480,000 letter while the budget math supports about $360,000.
- Build your own number from the other direction: rent plus redirectable surplus equals housing capacity, and at 6.55% with 10% down, each $100,000 of price costs about $802 a month all-in.
- The loan payment is only about 70% of the true cost. Taxes, insurance, PMI, and 1% a year of maintenance add the rest, and no lender formula counts maintenance at all.
- Stress test the ceiling before you shop: rate +1%, three lean months, and a $5,000 year-one repair. If any test fails, lower the price, not the standards.
- The approval letter is a ceiling. Your surplus, your reserve, and your savings rate set the target.
Sources: CFPB: Buying a House · The Finvest Personal Finance Guide · Bankrate: Current Mortgage Rates