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.