How much house can you afford? The 28/36 rule
Lenders answer the affordability question with two ratios, together called the 28/36 rule. The first (the front-end or housing ratio) says your total monthly housing cost — mortgage principal and interest, property taxes and homeowner's insurance, often shortened to PITI — should stay under 28% of your gross monthly income. The second (the back-end or total-debt ratio) says housing plus all your other monthly debts — car loans, card minimums, student loans — should stay under 36% of gross monthly income. Your real budget is whichever limit is lower after your existing debts are subtracted, and that is exactly the budget this calculator starts from. It then works backwards: given that monthly budget, your down payment, the mortgage rate and term, and tax and insurance rates that scale with the price, it solves for the most expensive home whose full monthly cost still fits.
The budget is a monthly amount. From it, the maximum price is found by dividing the budget (plus the payment your down payment offsets) by the combined monthly cost per dollar of price: the mortgage payment factor for your rate and term, plus one-twelfth of the yearly tax and insurance percentages. A higher rate, or higher local taxes, therefore lowers the price you can afford even at the same income — the budget is fixed, so each dollar of price must cost less per month.
Worked example
Your household earns $90,000 a year — $7,500 a month gross. The 28% housing limit is $2,100 a month. The 36% limit is $2,700, minus your $300 of monthly debts gives $2,400 — so the 28% limit binds and your budget is $2,100. With $40,000 saved for a down payment, a 6.5% mortgage over 30 years, property tax at 1.1% of the price per year and insurance at 0.35%, that budget supports a maximum price of $312,501.39: a loan of $272,501.39 costing $1,722.39 a month in principal and interest, plus $286.46 of tax and $91.15 of insurance — $2,100.00 in total, exactly on budget. Notice how much of the budget the non-loan costs consume: nearly $378 a month never touches the mortgage at all.
What lenders check beyond the two ratios
- Credit score. It does not change the 28/36 math, but it decides your rate — and the rate decides how much house a given budget buys. It can also decide approval outright.
- Other DTI ceilings. Many mortgage programs allow a back-end ratio up to about 43%, and some stretch further with strong reserves and credit. The 36% here is the classic, conservative version of the rule; qualifying at 43% is not the same as comfortably affording the payment.
- Reserves and closing costs. Lenders want to see cash left after the down payment, plus 2–5% of the price for closing costs. A down payment that empties your savings makes you a riskier borrower and a more fragile homeowner.
- Income stability. Two years of steady employment or self-employment income on tax returns is the usual standard; a brand-new income stream may not count in full.
Costs beyond PITI
Even a perfectly-on-budget PITI payment is not the full cost of owning. Budget separately for utilities (usually higher than in a rental), routine maintenance — a common planning figure is 1% of the home's value per year — occasional major repairs, HOA dues where they apply, and private mortgage insurance (PMI) if your down payment is under 20% of the price. If the all-in figure strains your monthly cash flow, the affordable price for your life is below the maximum this formula allows — treat the result here as a ceiling, not a target.
Worked example
Your household earns $90,000 a year and pays $300 a month toward other debts. The 28/36 rule gives you a housing budget of $2,100 a month. With $40,000 down, a 6.5% rate over 30 years, 1.1% property tax and 0.35% insurance, the maximum price is $312,501 — a $272,501 loan at $1,722.39 a month, plus $286.46 tax and $91.15 insurance. Pay off the $300 monthly debt before you buy and the budget is unchanged here (the 28% limit binds), but on a tighter income that same $300 could be the limit that decides your price.
How to use this calculator
- Enter your total annual household income before tax — lenders use gross income for these ratios.
- Add up your monthly debt payments: car loans, card minimums, student and personal loans (not utilities or rent you will leave behind).
- Enter the down payment you have saved, keeping some cash aside for closing costs and reserves.
- Enter the mortgage rate you expect and choose a term; then set your local property tax and insurance rates as a percentage of the price per year.
- Read your maximum price — then price a specific home with the Mortgage Calculator and check the real payment still fits your actual monthly life, not just the formula.
How to afford more — honestly
There are only four real levers, and this calculator shows each one. Reduce debts: when the 36% limit binds, every $100 of monthly debt you eliminate adds $100 to your housing budget. Save a bigger down payment: it shrinks the loan directly and, past 20% of the price, removes PMI. Lower the rate: better credit, more lender quotes, or a shorter term all cut the monthly cost per dollar borrowed — though a shorter term raises the payment factor, so it can lower the maximum price even while it saves interest overall. Look where taxes are lower: at a 2% tax rate instead of 1.1%, the same budget in the example above affords noticeably less house, because so much of the budget is consumed before the loan is paid. Run your own combination through the Mortgage Calculator and the Loan Eligibility Calculator before you fall in love with a listing.