How much home can you actually afford on a high income
Say you and your spouse earn around $300K combined, you have good credit and 20% down saved, and the lender pre-approves you for $1.5M. The congratulations email arrives. It doesn't answer whether you can actually afford it.
That is the right question. And it is almost never the one the pre-approval answers.
What the 28/36 rule actually measures
Most lenders use some version of the 28/36 rule. Your housing payment should be under 28% of gross monthly income. Total debt payments should be under 36%. At $300K gross, that is about $7,000 a month for housing under the front-end ratio.
There are good reasons lenders use this. Gross income is consistent across borrowers, easy to verify from a W-2, and the ratio has decades of default data behind it. From a credit-risk standpoint it works. It tells the bank what you can pay without missing a mortgage payment.
But the 28/36 rule is a risk metric for the lender. Your bar is different: will this payment let me live the life I actually want. The bank's bar is whether the loan gets paid.
The math on a $1.5M house
Let me walk through the numbers I ran for this couple.
$1.5M purchase price, 20% down, $1.2M mortgage. At 6.75% on a 30-year fixed, principal and interest is about $7,780 a month.
Property taxes and insurance in most metros add $1,500 to $2,000 a month. Call it $1,750. If there is an HOA, add more. I'll skip it here to keep the math clean.
Monthly all-in: roughly $9,500. Annual: about $114,000.
Now the part the pre-approval letter does not show. On $300K gross in a state with income tax, take-home after federal, state, payroll, and a maxed 401(k) is roughly $180K to $190K depending on filing status and deductions. Call it $185K.
$114K of that $185K goes to the house. That is 62% of take-home.
What the pre-approval does not see
The lender does not know whether you are already maxing two 401(k)s. They do not know your kids are starting daycare next year at $30K a pop. They do not know you are planning to pay cash for a car in three years, or that one of you wants to cut back hours when the second kid comes.
The 28/36 rule treats every dollar of gross income the same. Your actual budget does not. A dollar going to federal tax is not available for a mortgage. A dollar going to a retirement account you do not want to stop funding is not available either.
A better number to run
Here is the calculation I walk clients through. It takes about five minutes.
- Start with your annual take-home pay. Not gross. What actually lands in your checking account after taxes and retirement contributions you do not want to reduce.
- Divide by 12 for monthly take-home.
- Estimate the all-in monthly housing cost: principal, interest, taxes, insurance, HOA. Not just the principal and interest the mortgage calculator spits out.
- Divide that monthly cost by monthly take-home.
The answer is the percentage of your actual spendable income the house will consume.
For this couple, the $1.5M house came out to roughly 62% of take-home. At that level, everything else in their life has to fit inside the remaining 38%. Groceries, childcare, travel, cars, any savings they are not already doing through payroll, and anything that breaks.
Two different couples can run the same calculation on the same house and get different answers about what feels livable. Someone with no kids and a paid-off car can handle a higher percentage than someone with daycare and a lease. The number is a starting point for a real conversation, not a pass or fail.
The question I actually ask
The question I'd ask about any pre-approval is: what do you have to stop doing to afford this? The lender already answered whether you can make the payment.
If the answer is "we would have to pause retirement contributions," that is a no from me nine times out of ten. Buying a house by stopping compounding in your 30s is a trade that looks fine on a spreadsheet and terrible twenty years later.
If the answer is "we would have to stop traveling for a couple years," that is a real conversation about what you want your life to look like.
If the answer is "nothing changes, the number just feels a little tight," you are probably fine.
Where this couple landed
They ran the numbers. Then they ran them again on a $1.15M house, which came out to about 48% of take-home and did not require touching retirement. They bought the smaller house. They also kept maxing two 401(k)s, funded 529s for the kids they do not have yet, and have a real emergency fund.
This post is general information, not personalized advice. Talk to a fee-only fiduciary about your specific situation.