05/06/2026
Homebuyers: Determining Affordability
The housing market, previously characterized by limited inventory since the onset of the COVID-19 pandemic in 2020, appears to be experiencing a shift towards increased buyer interest. Key factors influencing this change include debt-to-income ratio, interest rates, and budget considerations.
Key West, Florida — By the third quarter of 2025, the housing market’s trajectory began to change, as indicated by market indicators from Redfin, the National Association of Realtors (NAR), and Homes for Heroes. The number of homes for sale in mid-2025 experienced a 9.4% year-over-year increase. Concurrently, the median existing home price in the United States reached $435,300 in June 2025, marking a 2% increase from the previous year. Price reductions became more prevalent compared to 2024, suggesting a cooling effect in certain market segments.
Despite ongoing affordability concerns, prospective homebuyers may finally be prepared to enter the market. When making such a decision, it is crucial for buyers to assess their financial capacity and determine a comfortable budget for purchasing a home.
Experts recommend that buyers combine lender affordability guidelines with an evaluation of their personal financial situation. These factors can assist individuals in establishing a reliable budget when searching for homes.
Debt-to-Income Ratio (DTI): Lenders employ various parameters to assess a borrower’s creditworthiness, including the calculation of the debt-to-income ratio (DTI). Wells Fargo explains that DTI can be determined by summing all monthly debt payments and dividing them by gross monthly income. This resulting figure is then multiplied by 100 to obtain a percentage. A lower DTI indicates a reduced risk to lenders.
The 28/36 rule is a standard guideline used by many mortgage lenders to determine if an individual can afford a home loan. It involves dividing the monthly housing costs by the gross monthly income and ensuring that the resulting figure does not exceed 28%. Additionally, the total monthly debt payments, including housing, car loans, student loans, credit cards, and homeowners association fees, should not exceed 36% of the gross monthly income.
For instance, if a prospective home buyer earns $10,000 per month, or $120,000 annually, their monthly housing costs should not exceed $2,800. Consequently, their total monthly debt payments, including housing, should not exceed $3,600.
Personal budget considerations are crucial when determining the amount of money a borrower can borrow. While lenders may allow borrowers to borrow a specific amount, it is essential to consider personal spending habits and savings goals to avoid living paycheck to paycheck and having all income allocated to a home. Establishing an emergency fund to cover unexpected expenses such as home repairs or income decline is also advisable. Ongoing costs associated with home management, including utilities and potential renovations, should also be factored in.
The income-to-home price ratio is another general guideline that suggests purchasing a home priced no more than three to five times the annual household income. For example, with an annual income of $100,000, an individual should aim for a home priced between $300,000 and $500,000. The specific range may vary based on existing debt.
Interest rates and other factors are also significant considerations when purchasing a home. The interest rate on home mortgages, along with the down payment, directly impact the total cost of the loan over its life. Resources such as Bankrate and Zillow offer home affordability calculators that incorporate interest rates, loan terms, down payment amounts, and property taxes. Purchasing a home during high-interest rate periods results in increased expenses over the loan’s duration. Additionally, the down payment amount significantly influences the overall cost of the home. Aiming for a 20% down payment eliminates the need for private mortgage insurance (PMI).
