How Much House Can I Afford—and What Will My Monthly Payment Really Be?

Qualifying is not the same as affording

A loan approval tells you the most a lender is willing to lend under its guidelines. It does not tell you what fits comfortably in your life. Lenders look mainly at your gross income and your debts. They do not see your child care costs, how much you want to save, or what you spend on travel, commuting or helping family.

So there are really two numbers: the maximum you could qualify for, and the payment you’re comfortable carrying month after month. Being “house poor” usually happens when a buyer treats the first number as the second.

How lenders measure what you qualify for

The main measure is your debt-to-income ratio, or DTI. It compares your monthly debt payments, including the new housing payment, with your gross monthly income, before taxes. Each program sets its own limits, and lenders can be stricter. As one example, Fannie Mae’s automated underwriting can accept a total DTI of up to 50% for some borrowers.

Because DTI uses income before taxes and leaves out most living expenses, a payment at the program’s limit can feel much tighter than the ratio suggests. Many buyers find it helpful to set their own target well inside what they qualify for.

What goes into the monthly payment

Your monthly housing cost has several parts. Some are paid to the lender, and some may be collected in an escrow account and paid out on your behalf.

Part of the cost	What to know
Principal and interest	Set by the loan amount, rate and term. Your Loan Estimate shows it
Property taxes	Often collected monthly in escrow. See the California notes below
Homeowners insurance	Required by the lender. Cost and availability vary by location in California
Mortgage insurance	Usually applies to conventional loans with less than 20% down, and to all FHA loans
HOA dues	Common with condos and planned communities. Paid separately, but lenders count them
Special taxes	Mello-Roos or other assessments, which appear on the property tax bill

The payment you see on a listing or online calculator often leaves out some of these. Ask for a full estimate that includes every line.

California property taxes, with an example

Under Proposition 13, the general property tax rate is limited to 1% of assessed value, plus additional amounts for local voter-approved bonds. When you buy, the home is reassessed, generally at the purchase price, and increases after that are limited to a maximum of 2% per year until the next change in ownership or new construction.

Hypothetical example: assume a purchase price of $800,000 and an assessed value equal to that price. The 1% base alone is $8,000 a year, or about $667 a month. Your actual bill is usually higher once local bonds and any special taxes are added, and the combined rate varies by location. Check the county’s current rates for the specific property.

Plan for a supplemental tax bill after you buy, too. It reflects the change in assessed value, and many lenders do not pay it from escrow, so it may come out of your own pocket.

Costs outside the mortgage payment

Owning a home brings expenses that never show up on the mortgage statement. These are the ones most often underestimated.

• Maintenance and repairs, from a water heater to a roof, which vary widely with the age and condition of the home
• Utilities, which can be higher than in a rental, especially for a larger home
• Earthquake coverage, which a standard California homeowners policy generally does not include
• Furnishing, moving and small projects in the first year

Building your own comfortable number

Start from your take-home pay, not your gross income. Subtract your regular spending and the savings you want to keep, such as retirement contributions and an emergency fund. What remains is the most you would want to spend on housing in total. Then set aside a monthly amount for maintenance and repairs, and see what is left for the payment itself.

Compare that number with the full payment estimate for the homes you’re considering. If the gap is uncomfortable, a lower price, a larger down payment or a different loan program may help, and each comes with its own trade-offs.

Getting real figures with Jack Terrell

If you would like to see both numbers side by side, the amount you might qualify for and the payment you’re comfortable with, Jack Terrell can help you build a full estimate that includes taxes, insurance, dues and mortgage insurance. As a mortgage broker, Jack can compare programs from more than one lender. You can start with a rough budget and decide your next step from there.

This article provides general information about real estate financing in California. It is not a loan offer, pre-approval, commitment to lend, or personalized legal, tax, or financial advice. Programs, availability, terms, and eligibility requirements vary by lender, property, and borrower and may change. Review the disclosures and loan documents applicable to your transaction and consult a qualified professional for tax, legal, or estate-planning guidance.
Jack Terrell, Mortgage Broker and Loan Originator | NMLS #103232 | CA DRE #00992181
California Mortgage Advisors, Inc. | NMLS #1825 | CA DRE #01170868
Licensed by the California Department of Real Estate.
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