How Much House Can I Afford? The Money Guy Approach — A Practical Homeowner Guide

Your lender says you are approved for four hundred and fifty thousand dollars. Your real estate agent sends you listings at four hundred and twenty-five. The monthly payment on a four-hundred-thousand-dollar loan at current rates is a number that fits on the preapproval letter but will crowd out every other financial goal you have for the next thirty years. The Money Guy approach to home affordability starts from a different premise. The lender tells you the maximum you can borrow. The Money Guy framework tells you the maximum you should borrow if you also want to retire on time, save for your children’s education, and not lie awake at night calculating whether you can afford a new roof.

Brian Preston and Bo Hanson, the financial advisors behind The Money Guy Show, have built a home-buying framework around a simple rule: a house should anchor your financial life, not consume it. Their guidelines are more conservative than what a mortgage underwriter will approve, and the gap between the two numbers is the difference between a house you can technically pay for and a house you can comfortably afford while still building wealth.

The Money Guy Home-Buying Framework — Three Numbers That Matter More Than the Preapproval Letter

The Money Guy approach rests on three rules that together define an affordable home purchase. The first is the down payment rule. Put at least twenty percent down. This eliminates private mortgage insurance, which costs between half a percent and one and a half percent of the loan amount per year and provides zero benefit to the borrower. It also gives you immediate equity, which means you are not underwater the day you close. A twenty percent down payment on a three-hundred-thousand-dollar house is sixty thousand dollars. If you cannot save sixty thousand dollars, the Money Guy framework would say you are not ready to buy a three-hundred-thousand-dollar house.

The second rule limits the purchase price relative to your income. The total purchase price should not exceed three times your gross annual household income. A household earning a hundred thousand dollars should look at houses priced at three hundred thousand or below. A household earning a hundred and fifty thousand can stretch to four hundred and fifty thousand. This rule is the hardest one for buyers in high-cost markets to accept, and it is the rule that most sharply separates the Money Guy approach from conventional mortgage underwriting. A lender will approve a debt-to-income ratio of up to forty-three percent, which can produce a purchase price of five or even six times income. The Money Guy cap of three times income keeps the mortgage payment small enough that saving for retirement, investing, and covering maintenance and repairs all remain possible.

The third rule caps the monthly housing payment. Total monthly housing costs, including principal, interest, property taxes, homeowners insurance, and any HOA fees, should not exceed twenty-five percent of your gross monthly income. On a hundred-thousand-dollar household income, that is about twenty-one hundred dollars a month. On a hundred-and-fifty-thousand-dollar income, it is about thirty-one hundred dollars. This payment cap naturally enforces the three-times-income purchase price rule at most interest rates, but the payment cap is the number that matters for your monthly budget. A house that costs three times your income at a seven percent interest rate produces a higher payment than the same house at four percent, and the twenty-five percent rule adjusts for interest rate changes in a way that the purchase price multiple alone cannot.

Why the Bank Will Approve You for More and Why You Should Not Take It

Mortgage underwriting uses a debt-to-income ratio that can reach forty-three percent for conventional loans and even higher for FHA loans. A household earning a hundred thousand dollars with no other debt can qualify for a monthly payment of about thirty-six hundred dollars under the forty-three percent DTI cap. That payment, at current rates, supports a loan of roughly four hundred and fifty thousand dollars, which with twenty percent down means a purchase price above five hundred and fifty thousand. The bank’s math is correct in the narrow sense that the payment is below the regulatory limit. The bank’s math is irrelevant to your actual life because it makes no provision for saving, investing, childcare, medical expenses, home maintenance, or the possibility that one income in a two-income household might disappear.

The Money Guy framework forces a margin of safety into the housing decision. The twenty-five percent payment cap leaves room in the budget for saving at least twenty to twenty-five percent of gross income toward retirement and other goals, which is the savings rate the Money Guy team recommends for building long-term wealth. A household that spends thirty-six percent of income on housing and saves five percent is house-rich and retirement-poor. A household that caps housing at twenty-five percent and saves twenty percent is building wealth with every paycheck. The choices look similar on the day of closing. They diverge over the next twenty years into two completely different financial lives.

The most uncomfortable moment in the Money Guy framework is the realization that the house you want and the house you can afford under these rules may be different houses. In a high-cost market where the median home is six hundred thousand dollars and the median household income is ninety thousand, the three-times-income rule says the median household cannot afford the median home. That conclusion is uncomfortable, but it is also a mathematical description of reality. Stretching to buy a house that violates all three rules does not change the math. It changes whose problem the math becomes when the furnace dies in January and the emergency fund is empty because every dollar went to the mortgage.

When the Rules Should Bend — Practical Exceptions the Money Guy Team Acknowledges

The twenty percent down rule has the most flexibility. The Money Guy team has acknowledged that in a rising market, waiting to save a full twenty percent can mean the house appreciates faster than the savings accumulate. Putting ten percent down and paying PMI for a few years while aggressively paying down the balance to reach eighty percent loan-to-value is a compromise they consider acceptable in specific circumstances. The key condition is that the total payment must still fall within the twenty-five percent cap including the PMI premium, and the plan to eliminate PMI must be concrete and short-term, not aspirational.

The three-times-income rule bends for high-income earners in a specific way. A household earning three hundred thousand dollars does not spend proportionally more on groceries, utilities, and transportation than a household earning a hundred and fifty thousand. The leftover income after basic living expenses is larger, which means a higher percentage of income can go toward housing without crowding out saving and investing. The Money Guy team has discussed this nuance on the show, noting that high-income households can reasonably stretch above three times income if they maintain the twenty-five percent payment cap and the twenty percent savings rate. A household earning three hundred thousand dollars can spend six thousand two hundred and fifty dollars a month on housing under the twenty-five percent rule, which can support a purchase price well above nine hundred thousand dollars at reasonable interest rates. The payment cap, not the purchase price multiple, is the binding constraint at higher incomes.

The rules also bend in the other direction for households with high fixed expenses. A household with two children in full-time daycare, which can cost two to three thousand dollars a month in many cities, has far less discretionary income than a childless household earning the same salary. The twenty-five percent payment cap assumes a typical spending profile. If your non-housing expenses are unusually high, the affordable housing payment is lower than twenty-five percent. The Money Guy framework is a starting point, not a substitute for building your own budget with your own numbers.

FAQ — How Much House You Can Afford

If interest rates drop, can I afford a more expensive house under the Money Guy rules?

The twenty-five percent payment cap naturally adjusts for interest rates. At six and a half percent, a hundred thousand dollars of mortgage debt costs about six hundred and thirty dollars a month in principal and interest. At four and a half percent, the same hundred thousand costs about five hundred and seven dollars. With a monthly payment cap of twenty-one hundred dollars, you can borrow about three hundred and thirty thousand at six and a half percent or about four hundred and ten thousand at four and a half percent. The lower rate buys more house under the same payment cap. But the three-times-income rule on purchase price does not adjust for rates, and both rules must be satisfied. If rates drop, your payment cap gives you more headroom. Your purchase price cap remains three times income.

What if three times my income will not buy anything in my city?

The Money Guy answer is direct and uncomfortable. If the math does not work in your city, the options are to increase your income, increase your down payment, move to a lower-cost market, or accept that renting while investing the difference is a financially sound alternative to buying a house that will make you house-poor. A house that costs five times your income with five percent down produces a payment that consumes forty percent or more of your gross income, which violates every principle of sustainable homeownership. Renting in a high-cost city while investing the down payment savings in a diversified portfolio can produce equivalent or superior long-term wealth compared to stretching for an unaffordable mortgage, especially when factoring in the maintenance costs, property taxes, and transaction costs of homeownership that renters do not pay.

Should we base the calculation on one income or two?

The Money Guy team recommends basing the calculation on the more conservative of the two approaches. If both incomes are stable and the household carries adequate disability and life insurance, using the combined income is reasonable. But the calculation should account for the possibility that one income could be interrupted by job loss, illness, or a decision to stay home with children. A mortgage that requires both incomes to the penny every month is a mortgage that creates a permanent low-grade anxiety that you will carry until the house is paid off or sold. The twenty-five percent rule using a single income buys you a smaller house. It also buys you the ability to sleep through a recession.