How much house can I afford? The 28/36 rule explained

"How much house can I afford?" is usually the first real question in buying a home, and the answer lenders give can be quite different from the one that feels comfortable. The standard starting point is a pair of ratios known as the 28/36 rule. Understanding how it works helps you see why your budget is what it is, and what changes it.

Debt-to-income ratio

Lenders measure affordability using your debt-to-income ratio (DTI): your monthly debt payments divided by your gross monthly income, meaning income before taxes. There are two versions:

• Front-end ratio: just your housing costs (mortgage principal and interest, property tax, homeowners insurance, mortgage insurance, and HOA dues) divided by gross monthly income.
• Back-end ratio: all your monthly debt payments, housing included, divided by gross monthly income. That adds car loans, student loans, minimum credit card payments, and similar debts.

The 28/36 rule

The traditional guideline is that housing costs shouldn't exceed 28% of gross monthly income, and total debt payments shouldn't exceed 36%. Whichever limit is lower sets your maximum housing payment.

Here's an example. Someone earning $90,000 a year has a gross monthly income of $7,500.

• 28% of $7,500 is $2,100 for housing.
• 36% of $7,500 is $2,700 for all debts. With a $600 car payment, that leaves $2,100 for housing.

Here both limits land at $2,100. With a $40,000 down payment, a 6.5% rate on a 30-year loan, 1.1% property tax, and $1,200 a year for insurance, $2,100 a month supports a home price of roughly $296,500. That payment breaks down as about $1,621 principal and interest, $272 property tax, $100 insurance, and $107 PMI (because the down payment is under 20%).

How the rate changes the answer

Interest rates have a big effect. Using the same example at 7.5% instead of 6.5%, the affordable price drops to about $275,800, more than $20,000 less, even though income and debts are unchanged. That's why affordability can change quite a bit between the start of a home search and the day you lock a rate.

Other ratios you might see

The 28/36 rule is a guideline, not a law. Some loan programs allow higher ratios, and FHA loans often use 31% and 43% as reference points, with exceptions possible above that. A more conservative household might target 25% and 33% instead. Being approved for more doesn't mean you should borrow more.

What the ratios leave out

DTI is based on gross income and on debts that show up on your credit report. It doesn't consider:

• Taxes, retirement contributions, and health insurance taken out of your paycheck.
• Childcare, which can cost as much as a second mortgage payment.
• Utilities, commuting, and other everyday costs, which can be much higher in a larger home.
• Maintenance and repairs. A common rule of thumb is to budget around 1% of the home's value per year.
• Closing costs and a cash cushion after the purchase.

For these reasons, many people choose a price below their maximum. A payment that leaves room to keep saving is almost always less stressful than one that uses every dollar a lender allows.

Work out your own number

The home affordability calculator runs these ratios for you, including taxes, insurance, and PMI, and lets you switch between standard, conservative, and higher-ratio rules. Once you have a price range, the mortgage calculator shows the full payment for a specific home.