Getting pre-approved for a mortgage can be an exciting moment. But just because a lender says you qualify for a $500,000 mortgage doesn’t mean you should actually borrow that much. Your mortgage should fit within your current financial means.
Lenders use standardized ratios and formulas designed to minimize their risk of a missed mortgage payment – or several. They’re primarily concerned with whether you can make the monthly payments based on your current income and debt obligations.
Most lenders use the 28/36 rule as their starting point: your housing costs shouldn’t exceed 28% of your gross monthly income, and your total debt payments shouldn’t exceed 36%. While these ratios provide a baseline, they don’t necessarily reflect what will make you comfortable and financially secure.
Here’s how to make a calculation for your circumstances.
Step 1) Calculate Your True Take-Home Income
Start with your actual monthly income after taxes, insurance premiums, and retirement contributions — not your gross salary. This might seem obvious, but you’d be surprised how many people base their mortgage calculations on pre-tax income and then wonder why their budget feels tight.
If you’re self-employed or have variable income, use your lowest typical monthly earnings from the past two years. Yes, this conservative approach might mean looking at smaller homes, but it also means you won’t panic during slower business periods.
Don’t forget to account for other regular deductions like health savings account contributions, union dues, or automatic transfers to savings accounts. The goal is to work with the money that actually hits your checking account each month.
For couples, this calculation becomes more complex. Consider what happens if one person loses their job or decides to stay home with children. Can you comfortably afford the mortgage on one income? Building this scenario into your calculations now can save significant stress later.
Step 2) Map Out Your Complete Monthly Expenses
This step requires brutal honesty about your spending habits. Pull out three months of bank and credit card statements, and categorize every expense. Don’t just focus on the big-ticket items — those daily coffee purchases and weekend dinners out add up more than you might realize.
Create categories for essentials (groceries, utilities, transportation, insurance), lifestyle expenses (dining out, entertainment, hobbies), and financial goals (emergency fund contributions, additional retirement savings beyond employer matches). Include annual expenses like car registration, property taxes for other assets, and holiday gifts by dividing them by 12.
Many financial advisors recommend budgeting 1-3% of your home’s value annually for maintenance and repairs. A $400,000 home could easily require $4,000-$12,000 per year in upkeep, depending on its age and condition.
Step 3) Determine Your Lifestyle Priority Level
Here’s where mortgage affordability gets personal. Some people are happiest when their housing costs are minimal, leaving maximum room for travel, dining, and experiences. Others prefer to stretch their budget for their dream home, knowing they’ll spend most of their free time enjoying that space.
Neither approach is right or wrong, but you need to be honest about which camp you fall into. If you’re someone who values flexibility and spontaneity, keeping housing costs to 20-25% of your take-home pay might serve you better than the traditional 28% of gross income recommendation.
Consider your stage of life as well. Young professionals might prioritize location over space, accepting higher housing costs to live in vibrant neighborhoods with short commutes. Families might prefer more space in suburban areas, even if it means longer commutes or older homes.
Think about your five-year plan too. Are you likely to want kids, change careers, or start a business? These life changes often come with income fluctuations, and having a lower mortgage payment provides valuable flexibility during transitions.
Step 4) Build In Your Buffer Zone
Financial advisors often talk about emergency funds, but mortgage affordability requires thinking about multiple types of buffers. Your emergency fund should cover 3-6 months of expenses, but your mortgage comfort calculation should also include buffers for income fluctuations, interest rate changes (if you’re considering an adjustable-rate mortgage), and lifestyle inflation.
A good rule of thumb is ensuring your total housing costs (including mortgage, taxes, insurance, and estimated maintenance) leave you with at least 15-20% of your take-home income unaccounted for. This buffer money handles unexpected expenses, allows for occasional lifestyle upgrades, and provides breathing room when life throws curveballs.
If you’re buying in an area with high property taxes or HOA fees, factor in potential increases. Property taxes tend to rise over time, and HOA fees rarely decrease. What feels comfortable today might feel tight in five years if these costs increase significantly.
Step 5) Test Different Scenarios and Stress-Test Your Numbers
Once you’ve calculated a comfortable monthly housing payment, reverse-engineer this into a home price range. Remember to include all housing costs: mortgage principal and interest, property taxes, homeowners insurance, PMI (if applicable), and HOA fees.
Run your numbers through various scenarios. What if interest rates increase by 1-2% before you buy? What if your income decreases by 10-20%? What if you need to replace a roof or HVAC system in the first few years? Stress-testing your mortgage comfort level helps ensure you’re making a decision you can live with across various circumstances. Consider different loan terms as well.
Don’t forget to factor in closing costs and moving expenses, which can easily add up to 2-5% of your home’s purchase price. These upfront costs shouldn’t drain your entire savings account, leaving you house-rich but cash-poor.
Calculating your mortgage comfort level is about designing a financial life that supports your life. The most beautiful home in the world won’t bring you joy if the monthly payments leave you stressed and financially stretched.
