Why Lender Approval Doesn't Mean Affordability

Melanie 

Ortiz Reyes

Content Specialist

Getting approved for $400,000 doesn't mean you should spend $400,000.

Lenders calculate how much they're willing to loan. That number often exceeds what buyers can comfortably afford. The difference between approval amount and actual affordability determines whether homeownership feels manageable or suffocating.

Understanding the 28% rule prevents years of financial stress and helps buyers find homes they can actually enjoy owning.

What Lenders Actually Approve You For

Mortgage lenders use debt-to-income ratio (DTI) to determine loan amounts. Most lenders approve buyers with DTI ratios up to 43%, and some go higher. This means up to 43% of gross monthly income can go toward all debt payments, including the future mortgage.

Here's what that looks like in practice:

Gross monthly income: $8,000 Maximum debt payments at 43% DTI: $3,440

If the buyer has $500 in car payments and $300 in student loans, that leaves $2,640 for housing costs. At current rates, that supports roughly a $450,000 loan.

The lender approves $450,000. But can the buyer actually afford it?

What the 28% Rule Actually Measures

The 28% rule states that total housing costs should not exceed 28% of gross monthly income. Housing costs include:

• Mortgage principal and interest
• Property taxes
• Homeowners insurance
• HOA fees (if applicable)
• PMI (if down payment is less than 20%)

Using the same $8,000 monthly income example:

28% of $8,000 = $2,240 maximum for housing

That's $400 less per month than what the lender approved. Over a year, that's $4,800 in breathing room. Over 30 years, that's $144,000 in financial flexibility.

Why Lenders Don't Use the 28% Rule

Lenders care about one thing: loan repayment probability. They analyze income stability and existing debt. They don't consider:

• Retirement savings goals
• Emergency fund needs
• Childcare costs
• Aging vehicle replacement
• Medical expenses not covered by insurance
• Career uncertainty
• Lifestyle preferences
• Future income changes

A lender doesn't know that the buyer plans to have kids in two years. They don't know about the aging HVAC system that will need replacement. They don't factor in the commute costs for the new job that required relocation.

The lender's job is risk assessment for the loan. The buyer's job is life assessment for everything else.

The Real Cost of Ignoring the 28% Rule

Scenario: Buyer approved for $425,000 at 43% DTI

Monthly gross income: $7,500 Maximum housing payment at 43% DTI: $3,225 (with existing debts) Actual affordable payment at 28% rule: $2,100

The buyer stretches to buy at full approval amount.

Monthly payments: $3,100 (mortgage, taxes, insurance) Remaining after housing and existing debt: $3,600

From that $3,600, the buyer must cover:

• Groceries
• Utilities
• Gas and car maintenance
• Phone and internet
• Clothing
• Entertainment
• Home maintenance
• Medical expenses
• Savings

What happens when the water heater breaks?

A $1,200 emergency wipes out the monthly cushion. The buyer carries credit card debt. The stress compounds. Every unexpected expense becomes a crisis.

Now consider the same buyer using the 28% rule.

Monthly payments: $2,100 (mortgage, taxes, insurance) Remaining after housing and existing debt: $4,600

The extra $1,000 per month funds:

• Emergency savings
• Home maintenance fund
• Retirement contributions
• Quality of life improvements

When the water heater breaks, savings cover it. No credit card debt. No financial panic.

How to Calculate Your 28% Number

Step 1: Calculate gross monthly income Annual salary ÷ 12 = gross monthly income

Step 2: Multiply by 0.28 Gross monthly income × 0.28 = maximum housing payment

Step 3: Account for all housing costs Maximum housing payment must include mortgage payment (principal + interest), property taxes, homeowners insurance, HOA fees, and PMI if applicable.

Step 4: Work backward to purchase price Use a mortgage calculator with your maximum housing payment to determine the purchase price you can afford, accounting for down payment, interest rate, and all recurring costs.

Common Pushback (And Why It's Wrong)

"Interest rates are high right now. If we don't max out our budget, we'll never afford the home we want."

Buying at the top of your approval when rates are high locks in the worst possible scenario. Refinancing later might lower payments, but it doesn't change the purchase price. Buying a less expensive home now and upgrading later beats overextending and facing foreclosure.

"We're both earning good money. Our income will only go up from here."

Maybe. Or maybe one person switches to part-time after having kids. Or maybe a health issue forces reduced hours. Or maybe a layoff happens. Banking on future income to afford current payments is speculation, not planning.

"Everyone we know spends more than 28% on housing. It's normal now."

Financial stress is also normal now. Credit card debt is normal. Divorce over money problems is normal. Being "normal" financially means being one emergency away from disaster. The 28% rule creates abnormal stability.

"Rent costs almost as much as a mortgage payment would. We're throwing money away."

Rent that consumes 28% of income is manageable. A mortgage that consumes 43% of income is suffocating. Buying a home stretches the budget more than renting because homeownership includes maintenance, repairs, property taxes, and unexpected costs that renting doesn't.

When to Bend the 28% Rule (Carefully)

Some situations warrant flexibility:

High income with low lifestyle expenses Someone earning $200,000 annually with minimal other costs can exceed 28% and still maintain financial security. The rule protects against overextension, but extremely high earners have natural cushion.

Temporary income reduction with strong savings A career transition that temporarily reduces income but comes with substantial emergency reserves and clear income growth trajectory might justify exceeding 28% briefly.

Significantly below-market interest rate An assumable mortgage at 3% when market rates are 7% changes the affordability math. Lower interest means more principal paydown and less long-term cost.

The key word is "carefully." Bending the rule requires honest assessment of risk tolerance, emergency reserves, and income stability. Most buyers convincing themselves they're the exception are actually following the path to financial stress.

What This Means for Your Home Search

If pre-approved for $450,000:

Calculate 28% of gross monthly income. Determine actual affordable housing payment. Use a mortgage calculator to find the corresponding purchase price. That number is likely $350,000 to $380,000.

The gap feels disappointing. Smaller homes, different neighborhoods, longer commutes. But the alternative is years of financial anxiety, deferred maintenance, and zero savings cushion.

Better options:

• Buy at the 28% threshold and enjoy financial breathing room
• Save a larger down payment to afford more house within the 28% rule
• Increase income before buying to raise the 28% threshold
• Find value in overlooked neighborhoods where 28% goes further

Questions to Ask Before Maxing Out Approval

• Can we handle a $5,000 emergency repair without using credit cards?
• What happens if one income disappears for six months?
• Are we saving for retirement at recommended levels?
• Do we have three to six months of expenses in emergency savings after closing?
• What gets cut from our budget if property taxes increase 15%?
• Can we afford this home AND maintain our quality of life?

If the answers create discomfort, the approval amount exceeds affordability.

Your Next Move

Lender approval measures loan risk. The 28% rule measures life quality.

Buyers who ignore this difference spend years stressed, savings-depleted, and one emergency away from financial crisis. Buyers who respect this difference sleep well, handle surprises, and actually enjoy homeownership.

Getting approved for a certain amount feels validating. Spending that full amount often feels suffocating. The 28% rule draws the line between validation and wisdom.

Calculate your number. Stick to it. Future financial stability depends on it.

Ready to find a home within your actual budget? Take the free homebuying knowledge quiz to identify gaps in your understanding before they cost you money.

Need help navigating affordability? PrimeStreet matches you with agents who prioritize your long-term financial health over quick commission checks.