How much home can you actually afford?
Before you fall in love with a home, know your real number. This guide walks you through exactly how lenders calculate affordability — and how to set a budget that works for your life.
Why affordability matters before you start shopping
One of the biggest mistakes buyers make is starting with the home search before understanding their budget. Knowing your number upfront saves you from heartbreak, wasted time, and — most importantly — from stretching into a payment that strains your finances.
This guide explains the exact formulas lenders use, the real costs beyond the mortgage payment, and how to find a number that lets you enjoy homeownership without financial stress.
Step 01
Start with your gross monthly income
Lenders base affordability on your gross monthly income — what you earn before taxes and deductions. Add up all income sources: salary, self-employment income, rental income, alimony, child support, and any other regular income you can document. If you're buying with a co-borrower, combine both incomes. This gross figure is the foundation for every affordability calculation your lender will run.
Key takeaways
Self-employed borrowers use a 2-year average of net income from tax returns — not gross revenue
Part-time or bonus income typically needs a 2-year history to be counted
Co-borrower income can significantly increase your buying power
Step 02
Understand the 28% front-end ratio
The front-end ratio (also called the housing ratio) compares your total monthly housing payment to your gross monthly income. Most conventional lenders want this below 28%. Your total housing payment includes principal and interest, property taxes, homeowner's insurance, and HOA dues if applicable. For example, if your gross monthly income is $7,000, your maximum housing payment would be around $1,960. This is a guideline — some loan programs allow higher ratios.
Key takeaways
FHA loans allow front-end ratios up to 31%; VA loans don't use a front-end ratio at all
Property taxes in Colorado Springs typically run 0.5–0.6% of assessed value annually
Don't forget PMI if your down payment is less than 20% on a conventional loan
Step 03
Calculate your debt-to-income ratio (DTI)
The back-end DTI is the most important affordability number. It compares all your monthly debt payments — housing plus car loans, student loans, credit cards, and any other installment debt — to your gross monthly income. Most conventional loans want a DTI below 43–45%. VA and FHA loans can go higher with compensating factors. To calculate yours: add up all minimum monthly debt payments, add your estimated housing payment, then divide by your gross monthly income.
Key takeaways
Paying off a car loan or credit card before applying can meaningfully increase your buying power
Student loans in deferment still count — lenders typically use 0.5–1% of the balance as a monthly payment
A DTI below 36% gives you the most loan options and best rates
Step 04
Factor in the real costs of homeownership
Your mortgage payment is just the beginning. Budget for property taxes (often escrowed into your payment), homeowner's insurance ($100–200/month for most Colorado Springs homes), HOA dues if applicable, and ongoing maintenance. A common rule of thumb: set aside 1% of the home's value per year for maintenance and repairs. On a $400,000 home, that's $4,000 a year — or about $333 a month. These costs are real and should be part of your affordability calculation.
Key takeaways
Ask your lender for a full payment breakdown including taxes and insurance — not just principal and interest
HOA dues are included in your DTI calculation — factor them in before you fall in love with a community
Older homes often need more maintenance — budget accordingly
Step 05
Work backward from a comfortable payment
Instead of asking 'how much can I borrow?', ask 'what monthly payment am I comfortable with?' Start with a number that fits your lifestyle — one that lets you save, travel, and handle surprises. Then work backward: subtract taxes, insurance, and HOA from that number to find your principal-and-interest budget. Use a mortgage calculator to find the loan amount that produces that payment at today's rates. This approach keeps you in control of your budget rather than letting the bank set your ceiling.
Key takeaways
Just because you qualify for a certain amount doesn't mean you should borrow that much
A 15-year mortgage builds equity faster but has a higher payment — run both scenarios
Rate changes of even 0.5% can shift your payment by $100–200/month on a $400K loan
Step 06
Get pre-approved to confirm your number
A pre-approval turns your estimate into a verified number. Your lender will pull your credit, review your income documents, and issue a letter stating exactly how much you're approved to borrow. This is the number you can shop with confidently. It also reveals any issues — credit problems, income gaps, high DTI — before you're under contract, giving you time to address them. Pre-approval is free, takes 1–2 days, and is the most important step you can take before house hunting.
Key takeaways
Pre-approval letters typically expire in 60–90 days — time your application to your expected search timeline
Multiple mortgage inquiries within a 45-day window count as one inquiry for credit scoring
Bring 2 years of tax returns, recent pay stubs, and 2–3 months of bank statements to your appointment
Ready to find your number?
Jerry and Lisa will run the real numbers for your situation — income, debt, down payment, and today's rates — so you know exactly what you can afford before you start shopping.
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