Start with the monthly number
Begin with your take-home pay and decide how much of it can go to housing without squeezing everything else. Then list your other monthly debts, such as car loans, student loans and credit card minimums.
Lenders look at two things: the housing payment, and your total monthly debts compared with your gross, meaning before-tax, income. Your own budget should look at the same pieces, but it should start from what actually lands in your account and what you want left over after the bills are paid.
What a monthly housing cost is made of
The part most people picture is principal and interest. Principal is the amount you borrowed, and interest is the lender's charge for lending it. On top of that come property taxes and homeowners insurance, which a lender often collects monthly and pays for you from an escrow account. In a condominium or planned community, add the association dues (HOA). A smaller down payment can also bring mortgage insurance, so ask whether it applies.
Then there is maintenance. Nobody bills you for it, but every owner pays eventually: a roof, a water heater, appliances, the yard. Set aside a monthly amount instead of hoping it never happens. Taxes, insurance and dues vary a lot from one home and place to the next, so get real figures for each home you consider rather than guessing.
Worked example: from budget to price range
All figures here are invented. A household earns $8,000 a month before taxes and has $450 a month in other debts. After looking at its take-home pay, it decides $2,300 a month is comfortable for the housing payment, plus $300 a month set aside for repairs. For the home it has in mind, it estimates $320 a month for property taxes and $100 for insurance, with no association dues.
That leaves $2,300 minus $420, or $1,880, for principal and interest. Using an example rate of 6.25% on a 30-year fixed loan, a payment near $1,880 supports a loan of about $305,300. The standard amortization formula gives a payment of $1,879.78 on that amount, with $371,422.46 in total interest over the 30 years. If the household has $50,000 saved for a down payment, the price range is about $355,300.
Because taxes, insurance and the rate all move the answer, treat it as a range and test prices a little above and below.
Why a lender's maximum is not a comfortable budget
Suppose the same household is pre-approved under an example limit of 43% of gross income for total monthly debts. Lenders set their own limits, so this is only an illustration. On $8,000 that is $3,440. Subtract the $450 of other debts and $2,990 is left for housing. Subtract the same $420 for taxes and insurance and $2,570 remains for principal and interest, which at the example rate supports a loan near $417,400, or a price near $467,400 with the same down payment.
That is $690 a month more than the household's own budget. The lender's number answers whether the loan fits its rules. It knows nothing about child care, commuting, savings goals or how steady your income is. Treat pre-approval as a ceiling to be aware of, not a target to aim at.
A short routine for your own range
Write down your gross monthly income and your other monthly debts. Pick a housing payment from your take-home pay. Subtract estimated taxes, insurance and any dues. Enter what is left, a rate quote you have actually received, and your down payment into the mortgage payment calculator, then adjust the price until the payment matches.
Add closing costs and moving costs to the cash you need, and keep your emergency savings separate from the down payment. If your finances are complicated, for example with self-employment income, a HUD-approved housing counselor or a licensed mortgage professional can review them with you.
Try the calculator
Run your own numbers in the free mortgage payment calculator. It works in your browser and nothing you enter is saved or sent.
Sources
Common questions
Is there a rule of thumb for how much to spend?
Websites and lenders cite percentage-of-income guidelines, but they differ and are only starting points. Your own budget, debts and goals should set the figure.
Which interest rate should I use?
Use a quote you have received for your own situation. The 6.25% in this guide is only an example rate.
Does the calculator include taxes and insurance?
Check which fields it offers. If a field is missing, add monthly taxes, insurance and dues to the payment yourself.
This guide is general information, not financial, tax or legal advice. Rates, fees and rules change, so confirm current terms with the lender, store or agency involved. All dollar figures are invented examples.