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The most common starting point is the 28/36 rule, a guideline many US lenders use: keep your total housing payment at or below 28% of your gross monthly income, and all your monthly debt payments, including the new mortgage, at or below 36%. For a household earning $96,000 a year with $650 a month in other debt payments and $70,000 to put down, that works out to a home price of about $335,000 at an illustrative 6.75% 30-year fixed rate.
Treat that figure as a ceiling, not a target. Below you'll see the math step by step, how your debts and the interest rate move the answer, and how to check the result against your real budget.
What the 28/36 rule says
The rule has two tests, and the lower result wins.
- Front-end ratio (housing ratio): your monthly housing payment divided by your gross monthly income, kept at or below 28%. The housing payment is often called PITI: principal, interest, property taxes and homeowners insurance. Add private mortgage insurance (PMI) and homeowners association (HOA) dues if you'll pay them.
- Back-end ratio: your housing payment plus every other monthly debt payment, divided by gross monthly income, kept at or below 36%. Other debts include car loans, student loans, personal loans, minimum credit card payments and court-ordered payments such as child support. Utilities, groceries and phone bills don't count.
Gross income means before tax and other deductions. Our guide to the debt-to-income ratio covers what lenders count in more detail.
The 28/36 rule is a guideline, not a law. Many lenders approve higher ratios, especially for government-backed loans or borrowers with strong credit and savings. Ask each lender which maximum ratios apply to your loan type.
Worked example: a $96,000 household income
Here are the inputs:
- Gross income: $96,000 a year, or $8,000 a month
- Other debts: a $420 car payment and a $230 student loan payment, $650 in total
- Down payment: $70,000, with closing costs paid from separate savings
- Property tax: an estimated $375 a month; homeowners insurance: $135 a month (illustrative, so get local figures)
- Loan: 30-year fixed at an illustrative 6.75%
| Step | Calculation | Result |
|---|---|---|
| Front-end limit | $8,000 × 28% | $2,240 |
| Back-end limit | $8,000 × 36% − $650 | $2,230 |
| Max housing payment | lower of the two | $2,230 |
| Less property tax and insurance | $2,230 − $375 − $135 | $1,720 |
| Max loan at 6.75% over 30 years | present value of $1,720 a month | $265,187 |
| Max home price | $265,187 + $70,000 | $335,187 |
To turn a monthly budget into a loan amount, use the present-value form of the mortgage payment formula:
Here L is the loan, M is the monthly principal-and-interest budget, r is the annual rate divided by 12 (0.005625 at 6.75%) and n is the number of payments (360). You can check the result in the mortgage calculator: $265,187 at 6.75% over 30 years costs $1,720.00 a month.
In this example the back-end test is the one that binds, by $10 a month. That happens whenever your other debts are more than 8% of your gross income, as the next section shows.
The $70,000 down payment is 20.9% of the price, so a conventional loan wouldn't need PMI. With less than 20% down, PMI becomes part of the housing payment and lowers the loan you can carry. Our guide to what PMI is and how to get rid of it explains the cost and how to remove it later.
How your other debts change the answer
Keep everything else the same and change only the monthly debt payments:
| Other monthly debts | Max housing payment | Max loan | Max home price |
|---|---|---|---|
| $0 | $2,240 | $266,729 | $336,729 |
| $300 | $2,240 | $266,729 | $336,729 |
| $650 | $2,230 | $265,187 | $335,187 |
| $1,000 | $1,880 | $211,225 | $281,225 |
| $1,500 | $1,380 | $134,135 | $204,135 |
Two things stand out. First, the gap between the two tests is 8% of gross income, or $640 a month here. Until your other debts pass that amount, the 28% front-end limit decides the answer and your debts make no difference to the maximum.
Second, once you pass that point, every extra $100 of monthly debt takes $100 out of the housing budget. At 6.75% over 30 years, $100 a month supports $15,417.87 of mortgage, so it costs you about $15,400 of buying power. Going from $650 to $1,000 of debts cuts the maximum price by $53,962.
That's why paying off a loan before you apply helps some buyers a lot and others hardly at all. In the example, clearing the $420 car loan would raise the limit by only $10 a month, because the 28% limit takes over. For a buyer with $1,000 of debts, the same move would add $360 a month to the housing budget, taking it from $1,880 back up to the $2,240 front-end limit.
How the interest rate changes the answer
Now hold the $1,720 principal-and-interest budget fixed and change the rate:
| Rate (illustrative) | Max loan | Max home price | Change vs 6.75% |
|---|---|---|---|
| 6.25% | $279,349 | $349,349 | +$14,162 |
| 6.75% | $265,187 | $335,187 | $0 |
| 7.25% | $252,134 | $322,134 | −$13,053 |
| 7.75% | $240,085 | $310,085 | −$25,102 |
| 8.25% | $228,947 | $298,947 | −$36,241 |
At this budget, each half-point change in the rate moves your buying power by roughly $13,000 to $14,000, and a full point between 6.25% and 7.25% is worth $27,215. Get a real rate quote, or a preapproval, before you settle on a price range.
Key idea The 28/36 rule tells you the largest payment a lender is likely to accept. It says nothing about childcare, retirement saving or the cost of keeping the house in good repair.
What the rule leaves out
The 28/36 rule is quick because it ignores most of your actual budget. Before you trust the number, check these:
- Take-home pay. The rule uses gross income, so two households with the same salary but different taxes, retirement contributions and health insurance costs get the same answer.
- Maintenance and repairs. A common rule of thumb is to set aside about 1% of the home's value each year, more for older homes. On a $335,187 home that's $3,351.87 a year, or about $279 a month, on top of the $2,230 housing payment.
- Utilities and commuting. A house often costs more to heat, cool and reach than an apartment.
- Cash at closing. The down payment isn't the only cash you need. Lender fees, title charges and prepaid taxes and insurance come due at closing, as covered in closing costs explained.
- Your emergency fund. Buying with every dollar you have leaves nothing for the first broken furnace.
A more conservative version
Some buyers cap housing at 25% of gross income instead of 28%. In the example, that means a $2,000 housing payment, $1,490 for principal and interest, a $229,726 loan and a $299,726 home. That's $35,461 less house, but $230 a month more breathing room.
Preapproval isn't the same as affordability
A lender's preapproval tells you how much it is willing to lend, and that can be above what the 28/36 rule suggests. The lender doesn't know about your daycare bill, your plans to start a family or how much you want to save. Use the preapproval as an upper bound and choose your own, lower, comfortable number.
If the numbers feel tight, compare the full cost of owning against renting for a few more years. The rent vs buy guide and the rent vs buy calculator show how long you'd need to stay for buying to pay off.
Outside the US: Canadian lenders use similar tests called the gross debt service (GDS) and total debt service (TDS) ratios, and federally regulated lenders must also check that you could afford the payment at a higher stress-test rate. UK lenders tend to cap borrowing at a multiple of income and run their own affordability checks on your spending.
Frequently asked questions
Does the 28/36 rule use gross or net income?
Gross income, before taxes and payroll deductions. That's why it can overstate what feels affordable if a large share of your pay goes to tax, retirement savings or health insurance.
Does my partner's income count?
If you both apply for the mortgage, the lender usually combines your incomes and your debts. If only one of you applies, only that person's income and debts are used.
What if my debts already exceed 8% of my income?
Then the back-end test sets your limit, and each $100 of monthly debt you clear before applying raises your housing budget by $100, until the 28% limit takes over. Compare the payoff cost with the extra buying power before you decide.
Should I always buy at my maximum?
No. The maximum leaves no room for repairs, rate changes on future borrowing or a drop in income. Many buyers aim for a payment comfortably below the 28% limit.
A quick checklist
- Work out 28% and 36% of your gross monthly income and subtract your other debt payments from the 36% figure.
- Take the lower result as your maximum housing payment.
- Subtract realistic property tax, insurance, HOA and PMI quotes to find your principal-and-interest budget.
- Convert that budget into a loan amount at a rate you've actually been quoted, using the home affordability calculator.
- Add your down payment, but keep closing costs and an emergency fund separate.
- Check that the payment plus about 1% a year for maintenance still fits your take-home pay, then aim below the maximum.
Run your own numbers in the home affordability calculator, then test the monthly payment for the homes you're considering in the mortgage calculator.
This article is for general education and is not financial advice. Rules, rates and products vary by lender and country. See our disclaimer.
