Buying a home is likely the largest financial commitment you'll make. The first question almost every buyer asks is: How much house can I actually afford?
The honest answer goes beyond what your lender approves you for. You need to understand the math behind affordability — and make sure your housing cost leaves room for everything else in your financial life.
The 28/36 Rule: Your Starting Framework
Lenders and financial planners use a simple rule of thumb called the 28/36 rule:
- 28% rule: Your monthly housing costs (mortgage payment, property taxes, insurance, and HOA) should not exceed 28% of your gross monthly income.
- 36% rule: Your total monthly debt obligations (housing costs + car payments + student loans + credit cards) should not exceed 36% of your gross monthly income.
These percentages map directly to what lenders call debt-to-income ratio (DTI), which is the primary factor they use to determine how much they'll lend you.
Example: $90,000 Annual Income
| Income Level | Max Housing Cost (28%) | Max Total Debt (36%) |
|---|---|---|
| $90,000 / year ($7,500/mo) | $2,100 / month | $2,700 / month |
| $120,000 / year ($10,000/mo) | $2,800 / month | $3,600 / month |
| $60,000 / year ($5,000/mo) | $1,400 / month | $1,800 / month |
Key insight: These are maximum limits, not targets. Many financial advisors recommend keeping housing costs at 25% or less of take-home pay for long-term financial flexibility.
What Counts as "Housing Cost" in the Calculation
When lenders calculate your front-end DTI, they include:
- Principal and interest (the core mortgage payment)
- Property taxes (typically 1–2% of home value per year, divided monthly)
- Homeowners insurance (typically $100–$200/month)
- HOA fees (if applicable)
- PMI (private mortgage insurance if your down payment is below 20%)
This full amount — often called PITI (principal, interest, taxes, insurance) — is what counts against your 28% limit.
Step-by-Step: Calculate Your Affordable Home Price
Step 1: Find your max monthly housing cost
Multiply your gross monthly income by 0.28 (28%).
Example: $8,000/month × 0.28 = $2,240 max housing cost
Step 2: Subtract taxes, insurance, and PMI
These vary by location and loan, but estimate:
- Property taxes: $250–$500/month (depends on home price and state)
- Homeowners insurance: $150/month
- PMI (if < 20% down): $80–$150/month
Example: $2,240 − $250 (taxes) − $150 (insurance) − $100 (PMI) = $1,740 left for principal + interest
Step 3: Convert P&I payment to home price
At a 7% interest rate on a 30-year mortgage, every $1,000 of monthly P&I supports roughly $150,000 of loan.
Example: $1,740 / $1,000 × $150,000 = ~$261,000 in loan amount
Step 4: Add your down payment
If you plan to put 10% down, divide the loan by 0.90.
Example: $261,000 ÷ 0.90 = ~$290,000 home price
The Down Payment Reality Check
Your down payment affects affordability in two ways:
- More down = smaller loan = lower monthly payment
- Less than 20% down = PMI, which adds to your monthly cost
Common down payment options:
- 3–3.5%: FHA loans and some conventional programs (first-time buyers)
- 5–10%: Conventional loans with PMI
- 20%+: Eliminates PMI, lowest monthly cost
How Interest Rates Change Everything
Small rate changes dramatically affect affordability. For a $300,000 loan:
| Interest Rate | Monthly P&I |
|---|---|
| 5.5% | $1,703 |
| 6.5% | $1,896 |
| 7.5% | $2,098 |
| 8.0% | $2,201 |
A 1% rate increase on a $300,000 loan costs roughly $200 more per month — about $72,000 over the life of the loan.
Don't Just Buy What You Qualify For
Here's the critical mistake most buyers make: treating approval amount as the target.
Lenders approve you based on their risk — not your lifestyle goals. A $400,000 approval doesn't mean a $400,000 home fits your budget after accounting for:
- Retirement savings
- Emergency fund contributions
- Car payments or savings
- Childcare or education costs
- Travel, dining, and discretionary spending
- Home maintenance (budget 1–2% of home value/year)
The 28/36 rule uses gross income. Many advisors prefer working from take-home pay and keeping housing under 30–35% of net income for meaningful financial breathing room.
Key Takeaways
- Start with the 28/36 rule: 28% of gross income max for housing, 36% for all debt.
- DTI is what lenders measure: Front-end (housing only) and back-end (all debt) ratios.
- Your approval limit is a ceiling, not a target — budget from take-home pay for a real number.
- Interest rates matter enormously: A 1% rate change can shift your purchasing power by $30,000–$50,000.
- Factor in all ownership costs: Property taxes, insurance, PMI, HOA, and maintenance add up fast.
Use the Calculator
Run your own numbers using our Mortgage Affordability Calculator — enter your income, debts, and down payment to get an instant purchase price estimate based on your specific situation.
This guide is for educational purposes only and does not constitute financial or lending advice. Consult a licensed mortgage professional for guidance on your specific situation.