When you apply for a mortgage, the lender will tell you the maximum amount you're approved for. This number will almost certainly be higher than you should spend. Lenders are in the business of lending money — the more they lend, the more interest they earn. Their incentive is not to keep you financially comfortable.
Here's how to calculate what you can actually afford — not the ceiling, but the sweet spot where you own a home without becoming house-poor.
The Bank's Formula vs. Reality
Lenders typically use two ratios to determine your maximum borrowing capacity:
Front-end ratio: Your housing costs (mortgage, taxes, insurance, HOA) shouldn't exceed 28% of your gross monthly income.
Back-end ratio: Your total debt payments (housing + car + student loans + credit cards) shouldn't exceed 36-43% of your gross monthly income.
The problem is these ratios use gross income — your salary before taxes, retirement contributions, and health insurance. Nobody lives on gross income. After a 25-30% effective tax rate plus deductions, your actual take-home might be 60-65% of gross.
Spending 43% of your take-home on housing leaves you with barely enough for everything else — especially if you're also saving for retirement, building an emergency fund, or paying off student loans.
The Pulsafi Framework: What You Can Actually Afford
Forget gross income. Here's a more realistic approach based on your net monthly take-home pay — the actual number that hits your bank account.
The 25% Rule (Conservative — Recommended)
Keep your total housing payment — mortgage principal, interest, property taxes, homeowner's insurance, and HOA fees — at or below 25% of your net take-home pay. This leaves enough room for retirement savings, emergency fund building, and actually enjoying your life.
If your household take-home is $7,000/month, that means a total housing payment of $1,750 or less. That likely puts you in the $280,000-$320,000 price range, depending on your down payment, interest rate, and local tax rates.
The 30% Rule (Moderate)
If you have no other debt, a solid emergency fund, and are already contributing to retirement, you can stretch to 30% of take-home. But this should be the absolute ceiling for most people, not the starting point.
The Costs Nobody Tells First-Time Buyers About
Closing Costs
Budget 2-5% of the purchase price for closing costs. On a $350,000 home, that's $7,000-$17,500 due at closing. This is on top of your down payment. Many first-time buyers are blindsided by this.
Maintenance and Repairs
The general rule is to budget 1-2% of your home's value per year for maintenance. A $350,000 home costs $3,500-$7,000/year in upkeep — new water heater, roof repairs, appliance replacements, landscaping, pest control. This isn't optional; it's the cost of homeownership.
The Opportunity Cost of Your Down Payment
That $70,000 down payment (20% on $350,000) could have earned 8-10% per year invested in the stock market. Over 30 years, that's potentially $700,000+ in foregone investment returns. This doesn't mean you shouldn't buy — but it means the "renting is throwing money away" narrative is incomplete.
When Renting Is Actually Smarter
Buying isn't always better than renting. In many high-cost markets, renting is significantly cheaper than owning on a monthly cash-flow basis. Here are situations where renting makes more financial sense:
You'll move within 5 years. Closing costs, selling costs (5-6% agent commissions), and the fact that early mortgage payments are almost entirely interest mean you'll likely lose money buying and selling in under 5 years.
The price-to-rent ratio in your area is above 20. If a home costs $500,000 but rents for $2,000/month, the ratio is 250 (500,000 ÷ 24,000 annual rent) — that's heavily skewed toward renting. Below 15 favors buying.
You'd have to drain your emergency fund for the down payment. Buying a house with no financial safety net is a recipe for disaster. One job loss or major repair could force you to sell at a loss or take on high-interest debt.
The Step-by-Step Before You Buy
Step 1: Calculate 25% of your monthly take-home. That's your housing budget ceiling.
Step 2: Subtract estimated property tax, insurance, HOA, and maintenance from that number. What's left is your maximum mortgage payment.
Step 3: Use our Mortgage Calculator to find what home price that payment supports at current rates.
Step 4: Make sure you still have 3-6 months of expenses in an emergency fund after paying closing costs and the down payment.
🏠 Run the Mortgage Calculator →The Bottom Line
The bank will approve you for the maximum. Your real estate agent will encourage you to spend it. But the house you can afford on paper and the house you can afford in real life are often very different numbers. Use 25% of your take-home as the target, include all the hidden costs, and make sure you're not sacrificing your financial future for a bigger kitchen.