Determining How Much Home You Can Afford
For the clients I work with at Melby Wealth Management who are preparing to buy, the most common surprise is how much a lender is willing to approve, and how uneasy that larger number makes them feel. They sense, correctly, that the approval amount and the responsible amount are not the same, but they are not sure how to find the line between them.
As a CERTIFIED FINANCIAL PLANNER® (CFP®) professional running a fee-only fiduciary firm in Nashville, my goal in writing this is to explain how I approach that line with clients, and why true affordability is a planning question rather than a lending one.
Mortgage Approval Is Not A Plan
A lender underwrites to the largest payment your income can technically carry. That calculation is built to protect the lender against default, and it works well for that purpose. It is silent on everything else that matters to your financial life: whether you are still funding retirement at a meaningful rate, whether your emergency reserve survives the purchase, and whether you keep the flexibility to handle a career change or a growing family.
The 28/36 guideline (housing under 28% of gross income, total debt under 36%) is where I start with clients, but I treat it as an outer boundary. The more useful work is mapping the payment against the rest of the plan. A payment that technically fits the 28/36 box can still quietly crowd out the long-term savings that build actual wealth.
Where Professional Guidance Changes The Result
A calculator can tell you a monthly payment. Here is what it cannot do, and where I add value for clients weighing a purchase:
Modeling the trade-offs in real dollars. When a client is choosing between two price points, I show what the difference in payment becomes if it is invested instead, and what it costs the long-term plan if it is not. Seeing the gap as a future portfolio balance, rather than an abstract "stretch," changes how people decide.
Coordinating the cash decision. How much to put down, and which accounts to draw from, is a tax and investment question. For clients with appreciated investments, equity compensation, or multiple account types, funding a larger down payment can trigger avoidable capital gains. I would generally recommend solving for the after-tax cost, not the largest possible down payment.
Protecting the foundation. In my experience, the buyers who run into trouble are rarely the ones who bought a slightly larger home. They are the ones who bought a reasonable home and left nothing behind it. I push clients to keep the emergency reserve intact and to fund the down payment and closing costs separately.
Stress-testing the payment. Before a client commits, we model what the payment looks like against a job change, a new child, or a higher property-tax reassessment. A payment that only works if everything goes right is not a payment that works.
One piece I always work through with couples is how a second income changes the picture. Two incomes can support a larger payment, but they also concentrate risk, because the budget then depends on both jobs holding steady at once. When a client is planning for a child, a possible sabbatical, or a future move to a single income, I model the payment against the income they can reliably count on rather than the combined peak. A home that is comfortable on two salaries and crushing on one is a decision worth making deliberately, with both people aware of the trade-off, rather than discovering it the first year something changes. The same goes for variable pay: I would generally base the housing decision on base salary and treat bonuses or commissions as a cushion, not as income the mortgage depends on.
A Number That Fits The Whole Plan
The right home price is the one that lets you own the home and still fund everything else you care about. That number rarely matches the approval letter, and finding it is what a financial plan is for. In practice, the clients who do this work before they start touring homes are the ones who shop with confidence and can walk away from the houses that would have stretched them, because they already know their number and trust it. A home should be one deliberate part of your financial life, not the decision that quietly dictates the rest of it.
For the consumer-facing version of this post, with the full affordability math and the hidden costs of ownership, head over to Melby Money.
Most people who schedule a conversation with us have never worked with a financial advisor before. That is exactly who we work with. If you are weighing a home purchase and want to know the number that fits your whole plan, get a comprehensive financial analysis.
About The Author
Shaun Melby, CFP® provides fee-only financial planning and investment management services in Nashville, TN through his company Melby Wealth Management. Shaun has over 15 years of experience as a financial advisor in Nashville. Shaun created Melby Money to educate the public about finances.
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