The lender will approve you for more than you should spend. That’s not a bug in the system — it’s how the system works. The approval is a ceiling. Your budget is a choice. This post is about making that choice with real numbers.
What a lender will approve you for — and what you should spend
A lender will let you spend more on a house than you probably should. They look at two ratios — front-end and back-end debt-to-income (DTI) — and approve you up to a limit. Here is how they work, with a real example.
Front-end DTI counts only your housing cost: principal, interest, tax, insurance, mortgage insurance, and HOA if there is one. Lenders generally let it run 31–40% of your gross monthly income, depending on the loan type.
Back-end DTI counts everything: housing plus car payments, student loans, credit cards, and anything else on your credit report. Most programs cap it at 43%, though some allow up to 50%.
Example: you earn $120,000 a year, which is $10,000 a month gross. Say your car payment is $400, your student loan is $200, and your credit cards are $400 — that’s $1,000 a month in debts before housing. At 43% back-end DTI, your total housing plus debts can’t exceed $4,300 a month. Subtract the $1,000 in debts and your max housing payment is $3,300 a month.
So the lender will approve you for a house with a $3,300 monthly payment. Should you buy it? That’s a different question — and it’s the one this post answers.
My rule: 25% of pre-tax income
I tell my buyers to keep their total housing payment under 25% of their pre-tax income. Not 43%. Not 40%. Twenty-five percent. That number leaves you room to live — to save, to handle a surprise repair, to keep your life. A payment at 43% DTI is technically approved. It is also the payment that leaves you house-poor the first time a water heater breaks.
Here is what that means at today’s rates. A $700,000 house on FHA — 3.5% down, 30-year fixed at 6.94% — is $5,881 a month, all in. At 43% DTI with no other debts, that’s about $164,100 a year. At my 25% rule, it’s $282,300. That is the gap between what a lender will approve and what I want you to spend. The approval is the ceiling. The 25% number is the budget.
What the payment actually is
Don’t budget from the loan amount. Budget from the payment. On a $700,000 FHA loan, the payment breaks down to $4,545 principal and interest, $729 property tax (1.25% of price, estimate), $292 homeowners insurance (~0.5% of value per year, estimate), and $315 monthly mortgage insurance. Total: $5,881. That is the number your budget has to carry, not the $687,321 loan.
Same math, different prices, FHA 3.5% down at 6.94%:
| House price | Total monthly payment | Income at 43% DTI | Income at 25% rule |
|---|---|---|---|
| $600,000 | $5,041 | $140,700 | $242,000 |
| $700,000 | $5,881 | $164,100 | $282,300 |
| $800,000 | $6,721 | $187,600 | $322,600 |
Property tax at 1.25% and insurance at about 0.5% of the home’s value a year in that math are estimates — your county and your quote will differ. No HOA or closing costs included.
Build the budget in 3 parts
This is the part the original post got right, and I’ve kept it — with one change. The original post had you build your budget from a Google Sheet. The tooling moved: the Home Budget sheet is now in the Home Budget tool on the site. Use it, or any sheet you like. The three parts are the same:
- Creating a budget and understanding how much you actually spend monthly. Track your actual spending — not what you think you spend, what you actually spend — for a month. That number is the truth your budget has to work with.
- Looking at both your budget and the amount a lender will approve you for. Put your budget number next to the lender’s number. The lender’s number is the ceiling. Your budget number is the target. If they’re far apart, that’s information — not a problem.
- Short-term and long-term planning, considering your career, living expenses, rent increases, and house prices. A budget is not a snapshot. It’s a plan for the next few years. What happens if your rent goes up 3% a year? What happens if you change jobs? What happens if house prices keep climbing?
Saving the down payment is part of the budget
The down payment is not separate from the budget. It’s the first line item. If you’re saving $150 a paycheck — that’s $3,600 a year — that’s not extra money. It’s part of the plan. I go deep on this in How to Save for a Down Payment on a House, and I also cover the assistance programs that can cover the whole 3.5% in Down Payment Assistance in California: Every Program Worth Knowing in 2026. One honest warning: CalHFA Dream For All is closed — its 2026 window ran February 24–March 16, 2026. Anyone still selling it as open is working off old information. MyHome and GSFA are the open alternatives.
Think long-term: rent vs. buy over 10 years
Renting feels cheaper month to month. Buying feels expensive. Over 10 years, the math flips — and this is the part of the original post I wanted to keep, because it makes the point better than any slogan.
In April 2013, the average rent for a three-bedroom home in Riverside County was about $1,577 a month. By April 2023, that same three-bedroom was renting for about $2,376 a month. Rents go up. Your mortgage doesn’t.
Now look at buying that same three-bedroom in April 2013. The average purchase price for a three-bedroom in Riverside County was about $240,000. By April 2023, it was about $565,000. Your mortgage payment on a 30-year fixed stays the same (except for tax and insurance, which drift up slowly). Your rent keeps climbing.
Do the math: if you rented that three-bedroom for 10 years, you’d pay about $1,585 a month on average (rising 3–6% a year) and have nothing to show for it. If you bought it, your payment would have been about $4,250 a month at the start — but after 10 years, you’d have paid down the principal, your home would be worth about $565,000, and your monthly cost would be closer to $3,552 (principal and interest staying flat, tax and insurance drifting up). The difference: about $3,564 a month in equity you built, and a home you own.
That’s the long-term case for buying. Not that it’s cheaper today — it’s usually not. But that your payment stays flat while rent climbs, and that every month you’re building equity instead of paying someone else’s mortgage.
A few things to keep in mind: your mortgage payment is not fixed forever — property tax and insurance can rise, and in California, Prop 13 caps your assessed value increase at 2% a year, which helps. Your home’s value can also fall — it’s not guaranteed to go up 3–6% a year. But over 10 years, the direction has been up. And after 30 years, 25% of your home’s value is yours outright — no more mortgage payment at all. Rent never ends.
Dat’s take
Borrowing the max is how people end up house-poor.
What to do with this
- Run your numbers in the Home Affordability Calculator — the payment is the reality check.
- Build the budget in the Home Budget tool.
- Read How to Save for a Down Payment on a House if the cash is the problem.
- Then start your pre-approval and I’ll run your exact numbers.
Hear me walk through budgeting on the podcast: Episode 21 — How to Budget for Buying a House. Affordability hub: Affordability.
Numbers in this post use the FHA rate from Mortgage Reports, November 6, 2026 (6.94%). Property tax (1.25%) and insurance (~0.5% of value) are estimates — your county and your quote will differ. Riverside County rent and price figures are from the original post (April 2013 and April 2023). This is education, not a rate quote or a loan approval. Dat Nguyen, Certified Mortgage Advisor, NMLS 1379110.