How much house can you afford?

The 28/36 rule: what lenders actually check

Mortgage affordability isn't really about what you'd like to spend, it's about two ratios underwriters run against your gross (pre-tax) monthly income. The front-end ratio caps your housing payment, principal, interest, taxes, and insurance (PITI), at about 28% of gross monthly income. The back-end ratio caps all of your monthly debt payments combined, housing plus car loans, student loans, credit cards, and the rest, at about 36%.

Whichever ratio produces the smaller housing budget is the one that actually limits you, because both have to hold at once. That's the piece people miss when they only check the front-end number: a manageable housing payment can still push you over the back-end limit if you're carrying other debt.

The 28/36 formulas

Both caps are simple percentages of gross monthly income, but they interact, which is why lenders check both.

• Front-end limit: Max PITI = 0.28 x gross monthly income
• Back-end limit: Max total debt payments = 0.36 x gross monthly income
• Max housing payment under the back-end rule = 0.36 x gross monthly income - existing non-housing debt
• Your actual housing budget = the smaller of the front-end and back-end results

Worked example: $8,000/month income, $500/month in debt

Take a household earning $8,000 a month gross (that's $96,000 a year) with $500 a month already going to a car loan and credit cards.

Front-end (28%): 0.28 x 8,000 = $2,240 maximum for PITI, the whole housing payment.

Back-end (36%): 0.36 x 8,000 = $2,880 maximum for all debt combined. Subtract the existing $500 in debt and the housing payment alone can go up to $2,880 - $500 = $2,380 before hitting that ceiling.

Compare the two: $2,240 (front-end) versus $2,380 (back-end). The front-end ratio is the tighter constraint here, so $2,240 a month is the real housing budget, not $2,380. That's the number that flows into the next step.

Turning your housing budget into a loan amount

PITI has four parts: principal, interest, taxes, and insurance. Only principal and interest (P&I) come from the loan itself, so taxes and insurance need to be estimated and subtracted before you can size the loan. For this example, assume a placeholder $300 a month combined for property taxes and homeowners insurance, a reasonable stand-in for a mid-priced home; your actual local tax rate and insurance quote will shift this.

That leaves $2,240 - $300 = $1,940 a month available for principal and interest. At a 6.5% rate over a 30-year (360-month) term, the monthly rate is 0.065 / 12 = 0.005417, and the standard amortization formula solved in reverse for the loan amount is Loan = M / [r(1+r)^n / ((1+r)^n - 1)].

Running the numbers, (1.005417)^360 comes out to about 6.992, which gives a payment factor of about $6.32 per $1,000 borrowed at this rate and term. Dividing the $1,940 P&I budget by that factor points to a loan amount of roughly $307,000. That figure moves with your assumed taxes and insurance, and with the rate you actually lock in, so use it as a planning range rather than an exact ceiling.

How your down payment changes the home price you can afford

The $307,000 figure above is the loan amount, not the home price, and the gap between the two is your down payment. A bigger down payment finances a smaller share of a pricier home for the same loan size.

With 10% down, that $307,000 loan is 90% of the price, implying a home price around $307,000 / 0.90, about $341,000. With 20% down, the same loan is 80% of the price, implying a home price around $307,000 / 0.80, about $384,000. Saving a larger down payment is one of the few levers you control directly, since it raises your affordable home price without changing your monthly budget at all.

PMI: the cost of a smaller down payment

Putting down less than 20% usually triggers private mortgage insurance (PMI), a monthly cost added on top of principal, interest, taxes, and insurance until you build enough equity. PMI typically runs about 0.5% to 1.5% of the loan balance per year.

On the $307,000 loan at a mid-range 0.75% annual rate, that's about $192 a month. PMI competes for space inside the same 28% housing cap as everything else, so adding it to the $2,240 budget from the earlier example leaves less room for principal and interest, which shrinks the loan amount you can actually qualify for. It's a real cost of a low down payment, not just an inconvenience, and it's worth pricing into your comparison against saving more before buying.

Common mistakes

A handful of assumptions consistently make people overestimate what they can comfortably afford.

• Checking only the front-end ratio: a housing payment can look fine at 28% and still blow past the 36% back-end limit once car and student loan payments are added in, as in the worked example above.
• Forgetting taxes and insurance entirely: quoting a loan amount as if principal and interest were the whole payment overstates what you can borrow, since taxes and insurance eat into the same monthly budget.
• Ignoring PMI on a low down payment: skipping this cost when comparing a 5%-down offer to a 20%-down offer hides a real monthly expense that can run $150-$300 or more.
• Using net (take-home) pay instead of gross income: the 28/36 rule is built on gross income, so applying it to your after-tax paycheck understates your real ratios and can lead to sticker shock at underwriting.
• Treating the maximum as the target: qualifying for a $307,000 loan doesn't mean that's the comfortable number for your life, especially with other savings goals or a variable income.

A second example where the debt limit is the one that binds

The earlier example was limited by the 28 percent housing cap. Change the inputs and the other ratio takes over. Take a household earning $120,000 a year ($10,000 a month) with $900 a month in car and student loan payments, a $40,000 down payment, a 6.5% rate, a 30-year term, a 1.2% property tax rate, and $1,800 a year in insurance. The front-end cap is 0.28 x 10,000 = $2,800. The back-end cap is 0.36 x 10,000 = $3,600, less $900 of debt, or $2,700. The smaller number wins, so the budget is $2,700.

The Home Affordability Calculator solves that budget for a maximum price of $382,864, a loan of $342,864, principal and interest of about $2,167, and about $533 for property tax ($382.86) and insurance ($150). Now watch what debt does. If the monthly debts were $400 instead of $900, the back-end cap would be $3,200, the 28 percent cap would bind, and the price would rise to $396,524, which is $13,660 higher. Choosing a 43% limit in the calculator gives the same $396,524 here, since the 28 percent cap becomes the binding constraint either way.

What a point of interest rate does to the price

Because taxes and insurance do not change with the rate, a rate move hits the portion of the budget that goes to the loan. Using the same $120,000 household, the maximum price is $415,867 at 5.5%, $382,864 at 6.5%, and $354,058 at 7.5%. A one point rise from 5.5% to 6.5% removes $33,003 of buying power, and the next point removes another $28,806.

This is a useful reality check on shopping strategy. A fixed monthly budget means higher rates do not just raise your payment; they lower the price tier you should be looking at. It also shows why term matters. At 6.5% on a 15-year loan, the same budget supports only $298,468, since the monthly cost per borrowed dollar is much higher. The 15-year payment is not unaffordable for everyone, but it needs a larger income or a bigger down payment to reach the same house.

What lenders count as debt, and what they count as income

On the debt side, underwriters generally include the minimum payments on credit cards, auto loans, personal loans, student loans, child support or alimony, and any other mortgage obligations. Student loans in deferment are often still counted using a percentage of the balance or a calculated payment. Groceries, utilities, insurance premiums, phone bills, and subscriptions are normally left out of the ratio, even though they take real money from your budget.

On the income side, steady base salary is the easiest to document. Bonuses, overtime, commissions, and self-employment income typically need a history, often about two years, and lenders may average them rather than use your best month. Rental income and part-time work may be counted only partly. Adding a co-borrower adds their income, but their debts and credit history come along with it, so a partner with large loan payments can lower your combined room rather than raise it.

Loan programs change the down payment and the ratios

The 28/36 guideline is a starting point, and programs vary. Conventional loans sold to Fannie Mae and Freddie Mac can be written with as little as 3 percent down for qualified buyers, though anything under 20 percent typically brings private mortgage insurance. FHA loans allow a down payment as low as 3.5 percent with a credit score of 580 or higher, and they charge both an upfront mortgage insurance premium and an annual one. VA loans for eligible service members and veterans often require no down payment and no monthly mortgage insurance, though most borrowers pay a funding fee. USDA loans serve eligible rural areas and have income limits.

Debt ratio limits also flex. Automated underwriting can approve back-end ratios in the mid-40s, and sometimes higher, for borrowers with strong credit, savings, or a larger down payment, while other files get held to tighter limits. On a $382,864 purchase, 3 percent down is about $11,486 and 3.5 percent is about $13,400, but a smaller down payment means a bigger loan, higher monthly cost, and less room under the same budget.

Cash you need beyond the down payment

A budget based on the monthly payment still leaves the cash side. Closing costs are commonly estimated at about 2 to 5 percent of the purchase price, and on $382,864 that is $7,657 to $19,143. Add the $40,000 down payment and you need between $47,657 and $59,143 at the table, before moving costs, immediate repairs, new furniture, and a cash cushion after you move in. Some loans and lenders also require reserves, meaning funds left over after closing, so ask what applies to your loan.

The down payment in this example is 10.4 percent of the price, so private mortgage insurance would probably apply. At an assumed 0.75 percent a year on the $342,864 loan, that adds about $214 a month. Because lenders include it in the housing payment, it pulls against the same $2,700 budget, leaving less for principal and interest and lowering the price you can reach. Get an actual PMI quote with your credit score and down payment, since rates vary widely.

Costs outside the lender's math, and a take-home sanity check

Maintenance is the most common omission. A widely used rule of thumb is to budget about 1 percent of the home's value per year for upkeep and repairs, which on $382,864 is about $3,829 a year, or $319 a month. Utilities, HOA dues, lawn or snow care, and a longer commute are further costs the ratios do not see, and older homes tend to cost more to maintain than new ones.

A useful check is to compare the payment with take-home pay. Assume this household takes home about $7,700 a month after taxes, retirement contributions, and insurance, which you should replace with your actual figure. The $2,700 payment is then 35 percent of take-home. Some planners prefer 25 to 30 percent of take-home, which is $1,925 to $2,310. At $2,310 a month the calculator supports a price of about $329,591, roughly $53,000 below the lender maximum. That lower figure leaves room for savings, repairs, and surprises.