How Much House Can I Afford?

The short answer: the 28/36 rule

Mortgage lenders judge affordability with two ratios. The front-end ratio says your housing costs should not exceed 28% of your gross monthly income. The back-end ratio says your total monthly debts, housing included, should not exceed 36% of your gross monthly income. Whichever cap is tighter is your maximum.

"Housing costs" means the full PITI payment: principal, interest, property tax, and homeowner's insurance, plus HOA dues and PMI (private mortgage insurance) where they apply. "Total debts" means the housing payment plus car loans, student loans, personal loans, and minimum credit card payments. Note the income used: gross income, before taxes, not take-home pay.

How lenders apply the two ratios

Take a household earning $120,000 a year, or $10,000 a month gross. The front-end cap is 28% of $10,000, which is $2,800 a month for housing. The back-end cap is 36% of $10,000, which is $3,600 a month for all debts.

Now subtract existing debts. Say this household pays $400 a month on a car and $300 on student loans: $700 of existing debt. The back-end rule allows $3,600 total, so housing gets $3,600 minus $700, which is $2,900 a month. The binding constraint is the smaller of the two caps, so the housing budget is $2,800 a month.

Turning the budget into a price: if about 70% of the housing budget can go to principal and interest after taxes and insurance, that is $1,960 a month for P&I. At 6.5% over 30 years, $1,960 a month supports a loan of about $310,093. With 20% down, the target home price is roughly $387,617.

Worked example: an $85,000 income

Run the same machinery on $85,000 a year ($7,083.33 a month gross). Front-end: 28% of $7,083.33 is $1,983.33 a month for housing. Back-end: 36% is $2,550 a month for all debts; with $500 of existing monthly debt, housing gets $2,050. The front-end cap binds: $1,983.33 a month.

With 70% available for principal and interest ($1,388.33 a month), the supportable loan at 6.5% over 30 years is about $219,649. With 10% down, that is a home priced around $244,055. Notice how the existing $500 of debt barely mattered here: the front-end ratio was already the tighter constraint, which is typical for buyers without large debt loads.

What the rules leave out

The 28/36 rule is a lending guideline, not a life guideline. It leaves out maintenance, which averages 1 to 2% of the home's value per year ($3,876 to $7,752 a year on our $387,617 example). It leaves out closing costs, typically 2 to 5% of the price due at purchase. It ignores HOA special assessments, utility jumps in a larger home, and the lifestyle costs of the neighborhood you buy into.

It also uses gross income. On $120,000 gross, take-home pay might be around $90,000 depending on taxes and benefits, which is $7,500 a month. A $2,800 housing payment is 28% of gross but 37% of take-home. That gap is why the maximum should be treated as a ceiling: the rule was designed to protect the lender, and protecting yourself means buying below it.

The down payment's double effect

A bigger down payment helps twice. First, it shrinks the loan and therefore the payment: on the $387,617 home at 6.5%, 20% down means a $310,093 loan with $1,960 a month of principal and interest, while 10% down means a $348,855 loan with $2,205 a month. Second, putting down less than 20% adds PMI, typically 0.5 to 1% of the loan per year, on top of the larger payment.

The down payment also buys resilience. With 20% equity you can absorb a 10% price dip and still sell without bringing cash to closing. With 5% down, the same dip leaves you owing more than the home is worth, which traps you if you need to move. Saving longer for the down payment is often the highest-return move a buyer can make.

From maximum to comfortable

Here is a practical way to use the numbers. Compute your maximum with the calculator, then set your target 10 to 20% below it. On the $120,000 income, that means shopping around $310,000 to $350,000 instead of stretching to $387,617. The gap becomes your buffer for maintenance, rate surprises at renewal, and the life you actually want to live in the house.

Then stress-test the payment: could you still afford it if property taxes rose 20%? If one income dropped for six months? If the answers are uncomfortable at the maximum but fine 15% below it, you have found your real budget. Run scenarios in our home affordability calculator and mortgage calculator, and if you are torn between buying and renting, our rent vs. buy calculator settles that debate with numbers.

Pre-approval vs. pre-qualification: what the bank's number means

When you start house hunting, lenders will give you a number in one of two forms, and the difference matters. Pre-qualification is an estimate based on numbers you report yourself: income, debts, down payment. It takes minutes, involves no verification, and the figure is roughly as reliable as your memory of your own finances. Pre-approval is a conditional commitment: the lender verifies your income, pulls your credit, and documents your assets, then states the maximum it will lend.

Sellers take pre-approval seriously and mostly ignore pre-qualification, so get the pre-approval before making offers. But understand what it is: the bank's maximum is the most they will risk, computed from the same 28/36 ratios in this guide, and it is almost always more than you should borrow. A pre-approval for $390,000 is not advice to spend $390,000; it is the ceiling of the lender's comfort, and your comfort should sit 10 to 20% below it, exactly as the "maximum vs. comfortable" framing above suggests.

Two practical notes. First, shop lenders: rates and fees vary meaningfully between banks, credit unions, and brokers, and a quarter-point rate difference on a $310,000 loan is worth roughly $17,000 over 30 years. Get at least three Loan Estimates and compare them line by line. Second, rate locks: once you choose a lender, you can lock the quoted rate for 30 to 60 days while you close. If rates are volatile, the lock fee is usually cheap insurance against the payment jumping before closing day.

Key takeaways

Lenders cap you twice: 28% of gross income for housing, 36% for all debts, and the tighter cap wins. Budget the full payment: taxes, insurance, PMI, and HOA are part of the 28%, not extras. Buy below the max: 10 to 20% under your ceiling leaves room for maintenance at 1 to 2% of value per year and for life's surprises. Down payment does double duty: it shrinks the payment and removes PMI, while buying resilience against price dips. Stress-test before you commit: if a 20% tax hike or six months of one income breaks the budget at the maximum, your real budget is lower. Run the scenarios in our home affordability calculator until the numbers feel boring, then go shopping.