Can You Really Afford That House? 7 Financial Checks Before Buying a Home
1/19/2026
"We can finally afford the monthly payment!"
This phrase has led more people into financial stress than almost any other in personal finance. The monthly mortgage payment is just the tip of the iceberg when it comes to housing costs. And in today's market - where home prices have risen 48% since 2019 while incomes grew only 22% - the gap between what you can borrow and what you can truly afford has never been wider.
Whether you are in Sydney watching prices climb, searching for a starter home in Texas, or weighing options in London, the fundamentals of housing affordability are universal. Before you sign that mortgage, here are 7 financial checks that could save you from becoming "house poor."
The Global Housing Reality
Let us be honest about where we are. The traditional benchmark for housing affordability - a price-to-income ratio of 3x - feels like a relic from another era. Today, the median sits at 5x income in many developed markets, with cities like Hong Kong reaching 14x, Sydney at 13x, and Vancouver at 12x.
Mortgage rates have settled into the 5.5-6.5% range globally after the rate hikes of 2023-2024. While lower than the peaks, they are significantly higher than the 2-3% rates that fueled the housing boom.
Here is the uncomfortable truth: waiting for the "perfect" market conditions is often a losing strategy. Interest rates and home prices rarely move in your favor simultaneously. The better approach? Focus on your personal financial readiness rather than trying to time the market.
The 7 Financial Checks
Check 1: The 28/36 Rule
This is the foundation of mortgage affordability, and it has stood the test of time for good reason.
The 28% Rule (Front-End Ratio): Your total housing costs should not exceed 28% of your gross monthly income. Housing costs include:
- Mortgage principal and interest
- Property taxes
- Homeowner's insurance
- HOA fees (if applicable)
The 36% Rule (Back-End Ratio): Your total debt payments - including housing - should not exceed 36% of your gross monthly income. This includes:
- All housing costs above
- Car payments
- Student loans
- Credit card minimums
- Personal loans
Example: If your household earns $8,000/month gross:
- Maximum housing payment: $2,240 (28%)
- Maximum total debt: $2,880 (36%)
- Available for non-housing debt: $640
This connects directly to the 50/30/20 budget rule - your housing costs fit within the "needs" category, which should total 50% of your income at most.
Reality check: Many lenders will approve you for more - sometimes up to 43-50% Debt-to-Income ratio (DTI). Just because you qualify does not mean you should borrow that much. The 28/36 rule builds in breathing room for life's surprises.
Check 2: The Down Payment Reality Check
The myth: You need 20% down to buy a house.
The reality: The median first-time buyer puts down 9%. Loan programs exist with minimums of 3-5% (conventional) or even 0% (for eligible borrowers in some countries).
But here is the critical point: Do not sacrifice your financial safety for a larger down payment.
Consider this scenario:
- Home price: $400,000
- Option A: 20% down ($80,000), depleting savings
- Option B: 10% down ($40,000), keeping $40,000 in reserves
Option B leaves you with a slightly higher monthly payment and requires private mortgage insurance. But Option A leaves you vulnerable to the first major repair, job disruption, or emergency.
The rule: Never use your emergency fund for a down payment. If reaching 20% down means emptying your savings, you are not ready to buy - or you need to look at less expensive properties.
Check 3: The Emergency Fund Buffer
Buying a house is not the finish line - it is the starting line of a new set of financial responsibilities.
Before purchase: Maintain 3-6 months of expenses in liquid savings, separate from your down payment.
After purchase: Plan to rebuild to 6+ months of expenses as quickly as possible.
Why so much? Because homeownership comes with expensive surprises:
- HVAC replacement: $3,000-$8,000
- Roof repair: $5,000-$15,000
- Foundation issues: $5,000-$20,000+
- Water heater: $1,000-$3,000
- Major plumbing: $2,000-$5,000
These are not "if" expenses - they are "when" expenses. Every home needs major repairs eventually. The question is whether you will have the cash to handle them or end up financing emergencies on credit cards at 20%+ interest.
If you are living paycheck to paycheck, there are strategies to build stability first before taking on a mortgage.
Check 4: The True Debt-to-Income Picture
Lenders calculate your DTI, but their calculation might not capture your full financial reality.
What lenders see:
- Reported debts on your credit report
- The new mortgage payment
What they might miss:
- Childcare costs
- Healthcare expenses beyond insurance
- Support for family members
- Subscription services and recurring expenses
- Variable income if you are self-employed or commission-based
Before applying for a mortgage, build a personal balance sheet that captures your complete financial picture. Your true DTI should include all regular financial obligations, not just reported debts.
Conservative target: Keep your true DTI (all regular expenses) below 50% of gross income. This gives you margin for saving, investing, and enjoying life - not just servicing debt.
Check 5: The Hidden Costs Calculation
Here is the number that shocks most first-time buyers: homeownership costs an additional $16,000-$21,000 per year beyond the mortgage payment.
Annual hidden cost breakdown:
| Category | Average Annual Cost |
|---|---|
| Maintenance and repairs | $10,000-$11,000 |
| Property taxes | $3,000-$4,300 |
| Homeowner's insurance | $2,000-$2,300 |
| Utilities | $4,500 |
| Internet and services | $1,500 |
| Total | $16,000-$21,000 |
That is $1,300-$1,750 per month on top of your mortgage payment.
These costs vary dramatically by location:
- Hawaii: $34,700/year
- California: $34,000/year
- Northeast metros: $24,000-$33,000/year
- Midwest markets: $12,000-$15,000/year
The 1% rule: Budget at least 1% of your home's value annually for maintenance and repairs. For a $400,000 home, that is $4,000/year minimum - though actual costs often exceed this.
This is similar to hidden costs in other areas of spending - the sticker price never tells the whole story.
Check 6: The 5-Year Commitment Test
Buying a house comes with substantial transaction costs that take years to recover:
Buying costs: 2-5% of purchase price
- Loan origination fees
- Appraisal and inspection
- Title insurance
- Attorney fees
- Moving costs
Selling costs: 6-10% of sale price
- Real estate agent commission (5-6%)
- Closing costs (1-3%)
- Repairs and staging
- Transfer taxes
Total round-trip cost: 8-15% of home value
If you buy a $400,000 home and sell for the same price after 2 years, you could lose $32,000-$60,000 in transaction costs alone.
The break-even timeline:
- National average: 2 years (just to recover immediate costs)
- Practical break-even: 5-7 years (accounting for equity building)
- Comfortable position: 7-10 years
Before buying, ask yourself:
- Could my job relocate me?
- Is my relationship stable?
- Will this home fit my family's needs for 5+ years?
- Is this neighborhood where I want to be long-term?
If any answer is uncertain, renting maintains your flexibility. There is no shame in renting - it is a valid long-term choice, not just a stepping stone to ownership.
Check 7: The Opportunity Cost Analysis
This is the check most people skip, and it might be the most important one.
When you make a down payment, that money stops working for you in the stock market, bonds, or other investments. Let us run the numbers:
Scenario: $100,000 over 10 years
| Investment | Average Annual Return | Value After 10 Years |
|---|---|---|
| Stock market index | 10% | $259,400 |
| Home equity appreciation | 3-4% | $134,000-$148,000 |
| Difference | - | $111,400-$125,400 |
That is over $100,000 in potential wealth you forgo by choosing a down payment over investing.
But wait - there is more opportunity cost:
- Annual hidden costs ($16,000-$21,000) could be invested if renting
- Mortgage interest (even if tax-deductible) is still a cost
- Time spent on maintenance could be earning income
When buying still wins:
- You plan to stay 10+ years
- Your local market has strong appreciation potential
- You want to modify or upgrade the property
- You value stability and roots over flexibility
- Tax benefits are meaningful for your situation
When renting wins:
- You might move within 5 years
- Local price-to-rent ratios favor renting
- You prefer investing your capital in liquid assets
- Your career requires geographic flexibility
- You value freedom from maintenance responsibilities
Neither choice is universally "better." It depends on your life stage, goals, and local market conditions.
Risk Factors to Consider
Beyond the financial checks, consider these risk factors that can turn homeownership from a wealth-builder into a burden:
Interest Rate Risk
If you choose a variable or adjustable-rate mortgage (ARM), your payments can increase substantially when rates reset. A $400,000 mortgage at 5% costs $2,147/month. At 7%, it jumps to $2,661 - a $514 monthly increase.
Fixed rates provide payment certainty but typically start higher. Variable rates offer lower initial payments but carry reset risk.
In uncertain economic times, the security of a fixed rate often outweighs the initial savings of a variable rate.
Job Security Assessment
Foreclosure activity rose 17% in late 2025 as some buyers stretched beyond their means. Before buying, honestly assess:
- How stable is your industry?
- How secure is your specific position?
- Could you find comparable employment locally if needed?
- If you have a partner, what happens if one income disappears?
Conservative approach: Only buy if you could maintain payments for 6+ months on one income or while unemployed.
Liquidity Risk
Home equity is not cash. If you need money quickly:
- Home sale takes 30-90+ days minimum
- Transaction costs consume 8-10% of value
- Market downturns can trap you underwater
Do not treat your home as an emergency fund or assume you can "just sell" if needed. Real estate is an illiquid asset, and forced sales often happen at the worst times.
The Market Timing Trap
Trying to time the market leads to two common mistakes:
- Buying during a frenzy because "prices only go up"
- Waiting indefinitely for a crash that may not come
Neither extreme serves you well. The best time to buy is when your finances are ready, your life situation is stable, and you find a home that meets your needs at a price within your budget - regardless of what the broader market is doing.
Rent vs Buy Decision Frameworks
If you are genuinely uncertain, these frameworks can help quantify the decision:
The 5% Rule
Developed by portfolio manager Ben Felix, this simple calculation accounts for the true costs of ownership:
Formula: Is your monthly rent greater than (Home Price x 5%) / 12?
- If rent > calculation result: Buying may be better
- If rent < calculation result: Renting may be better
Example:
- Home price: $500,000
- 5% of price: $25,000
- Monthly equivalent: $2,083
- If your rent is $1,800: Renting wins
- If your rent is $2,400: Buying might win
The 5% accounts for property taxes (~1%), maintenance (~1%), and cost of capital/opportunity cost (~3%).
Price-to-Rent Ratio
Formula: Home Price / (Monthly Rent x 12)
- Ratio below 15: Buying likely better
- Ratio 15-20: Roughly equivalent
- Ratio above 20: Renting likely better
Example:
- Home price: $600,000
- Annual rent for similar home: $30,000
- Ratio: 600,000 / 30,000 = 20
- At ratio of 20, renting and buying are roughly equivalent
Most expensive metros have ratios well above 20, making renting the mathematically superior choice - though personal factors may still favor buying.
Your Pre-Purchase Checklist
Before making an offer, confirm you can check every box:
- Housing costs under 28% of gross income
- Total debt under 36% of gross income
- 3-6 months emergency fund SEPARATE from down payment
- True DTI (including all expenses) under 50%
- Budget includes $1,300-$1,750/month for hidden costs
- Planning to stay 5+ years minimum
- Considered opportunity cost of down payment
- Assessed job security realistically
- Understood interest rate risk if using ARM
- Ran rent vs buy calculations for your market
Missing even one or two of these creates meaningful financial risk.
Final Thoughts
The question is not "Can I get approved for a mortgage?" Lenders will often approve you for more than you should borrow.
The real questions are:
- Can I afford this home while still saving for retirement?
- Can I afford this home while maintaining an emergency fund?
- Can I afford this home while still enjoying life?
- Can I afford this home if something goes wrong?
A house should enhance your life, not consume it. If buying means sacrificing your financial security, flexibility, or peace of mind, it is not the right time - no matter what the market is doing or what others around you are buying.
Run the numbers. Be honest with yourself. And remember: renting is not "throwing money away" - it is paying for flexibility, freedom from maintenance, and the opportunity to invest your capital elsewhere.
When you are truly ready - financially and personally - buying a home can be one of the most rewarding decisions you make. Just make sure you are buying from a position of strength, not stretching into a position of vulnerability.
Sources
- Harvard Joint Center for Housing Studies - Home Prices vs Income
- Demographia International Housing Affordability Report
- Bankrate - Mortgage Rate Forecast
- National Association of Realtors - Home Buyer Statistics
- Bankrate - Hidden Costs of Homeownership Study
- Zillow - Hidden Homeownership Costs Report
- ATTOM Data - Foreclosure Market Report
- PWL Capital - The 5% Rule for Rent vs Buy
- Fannie Mae - Debt-to-Income Guidelines
Related Reading
Frequently Asked Questions
What is the 28/36 rule for buying a house?
The 28/36 rule states that you should spend no more than 28% of your gross monthly income on housing costs (mortgage, taxes, insurance) and no more than 36% on total debt payments including housing.
How much emergency fund should I have before buying a house?
You should maintain 3-6 months of living expenses as an emergency fund before buying, and plan to rebuild to 6+ months after purchase to cover unexpected repairs and maintenance.
What are the hidden costs of homeownership?
Hidden costs include maintenance and repairs (averaging $10,000+ annually), property taxes, homeowner's insurance, utilities, HOA fees, and major system replacements like HVAC and roofing.
Is it better to rent or buy in 2026?
It depends on your situation. Use the 5% rule: if monthly rent is less than 5% of the home price divided by 12, renting may be better financially. Also consider how long you plan to stay - buying typically makes sense if you stay 5+ years.
How long should I plan to live in a house before buying?
Most financial experts recommend planning to stay at least 5-7 years to break even on transaction costs (8-10% of home value) and build meaningful equity.
What debt-to-income ratio do I need for a mortgage?
Most lenders prefer a total debt-to-income ratio of 36% or less, though some will approve up to 43-50% with strong compensating factors like excellent credit or substantial cash reserves.
Should I use my emergency fund for a down payment?
No. Never drain your emergency fund for a down payment. Homeownership comes with unexpected costs, and being house-rich but cash-poor puts you at significant financial risk.