The 28/36 Rule: Your Starting Point

The most common method lenders use is the 28/36 rule. Your housing payment (mortgage, property tax, homeowners insurance, and HOA fees if applicable) should not exceed 28% of your gross monthly income. Your total debt payments—including the mortgage, car loans, credit cards, and student loans—should not exceed 36% of gross income.

Here's how to use it: If you earn $5,000 per month gross, your housing payment should stay under $1,400 (28% of $5,000). Your total debt payments should stay under $1,800 (36% of $5,000). That means you have $400 left for other debts if you're at the housing limit.

This rule is a ceiling, not a target. Just because you can borrow that much does not mean you should. Lenders often approve loans larger than what you can comfortably pay, especially if you have other debts or irregular income.

Key Takeaways

  • Your housing payment should not exceed 28% of your gross monthly income using the standard lending rule, though your actual comfort level may be lower.
  • Lenders look at your total debt-to-income ratio (36% maximum), so existing car loans and credit card payments reduce how much house you can afford.
  • Your down payment size directly affects your monthly payment—a larger down payment means a smaller loan and lower monthly costs.
  • Property taxes, homeowners insurance, and HOA fees are part of your housing payment, not extras, so factor them into your affordability number.
  • Your actual comfort zone is often lower than what lenders will approve, especially if you have irregular income or want to save money each month.

How Down Payment Size Changes Your Monthly Payment

The amount you put down at purchase directly shrinks your loan size and your monthly payment. A 20% down payment on a $300,000 house means you borrow $240,000. A 10% down payment means you borrow $270,000. That $30,000 difference adds roughly $180 to your monthly payment (depending on interest rates and loan length).

Putting down less than 20% triggers private mortgage insurance (PMI), an extra monthly fee that protects the lender if you default. PMI typically costs 0.5% to 1% of your loan amount per year, divided into monthly payments. On a $270,000 loan, that could be $112 to $225 per month on top of your principal and interest.

If you have limited savings, a smaller down payment lets you buy sooner, but your monthly payment will be higher and you'll pay PMI until you reach 20% equity. If you can wait and save, a larger down payment lowers your monthly cost and eliminates PMI entirely.

Interest Rates and Loan Length Affect What You Can Afford

A 1% difference in interest rate changes your monthly payment significantly. On a $240,000 loan over 30 years, the difference between 6% and 7% interest is roughly $160 per month. Over the life of the loan, that's nearly $58,000 more in interest.

Loan length matters too. A 15-year mortgage has a higher monthly payment than a 30-year mortgage on the same amount, but you pay far less interest overall. A 30-year loan at 6% on $240,000 costs about $1,439 per month. A 15-year loan at the same rate costs about $1,439 per month. A 15-year loan at the same rate costs about $1,719 per month—$280 more each month, but you own the house free and clear 15 years sooner and pay roughly $150,000 less in total interest.

Before you settle on a house price, get a rate quote from at least two lenders. Rates change daily, and even a 0.25% difference affects your affordability number. If rates are high when you're shopping, you might afford less house than you would if rates drop later.

Property Taxes, Insurance, and HOA Fees Are Part of Your Payment

Your monthly housing payment includes more than just the mortgage principal and interest. Property taxes vary widely by location—some counties charge 0.3% of home value per year, others charge 2% or more. A $300,000 house in a high-tax area could cost $500 per month in property taxes alone. In a low-tax area, it might be $75 per month.

Homeowners insurance is required by lenders and typically costs $100 to $200 per month, depending on the home's age, location, and your coverage level. If you're in a flood zone or hurricane zone, insurance costs more. If you put down less than 20%, you also pay PMI, which can add $100 to $300 per month.

If the house is in a planned community or condo, HOA fees are mandatory and can range from $50 to $500+ per month. These are not optional and not tax-deductible. When you calculate your affordability, add property tax, insurance, PMI (if applicable), and HOA fees to your mortgage payment. That total is what counts against your 28% threshold.

Debt You Already Have Reduces Your Housing Budget

The 36% debt-to-income rule includes everything: your mortgage, car payments, student loans, credit card minimums, and any other monthly debt. If you earn $5,000 per month and already pay $800 in car and student loan payments, you have only $1,000 left for your housing payment (36% of $5,000 = $1,800, minus $800 in other debt).

Before you shop for a house, add up all your monthly debt payments. Subtract that total from 36% of your gross income. What's left is your maximum housing payment. If that number is uncomfortably tight, paying off a car loan or credit card before buying will increase your housing budget.

Some lenders are stricter than the 36% rule and use 43% instead. Others are more flexible if you have excellent credit and a large down payment. But 36% is the standard, and it's a useful number to know before you talk to a lender.

Your Comfort Zone Is Often Lower Than What Lenders Approve

Lenders approve loans based on income and debt ratios, not on your actual life. A lender might approve you for a $1,400 monthly payment, but if you have irregular income, young children, aging parents, or a history of tight months, that payment might leave you stressed and unable to save.

A practical rule: aim for a housing payment that leaves you at least $500 to $1,000 per month after all expenses for emergencies, savings, and breathing room. If your budget is so tight that one car repair or medical bill forces you to skip a mortgage payment, the house is too expensive.

If you're self-employed or have commission-based income, lenders may average your income over two years, which can lower your approval amount. If you're recently divorced or changed jobs, some lenders will not count new income for the first two years. These situations often mean your actual affordability is lower than the 28/36 rule suggests.

How to Calculate Your Specific Number

Start with your gross monthly income (before taxes). Multiply by 0.28 to find your maximum housing payment. Multiply by 0.36 to find your maximum total debt payment. Subtract your existing monthly debts from that 36% number. The result is your housing budget.

Next, estimate your property taxes and insurance. Contact your county assessor's office for property tax rates in the area where you want to buy. Call a homeowners insurance agent for a quote on a house at your target price. Add those to your mortgage payment estimate.

Use an online mortgage calculator to see what loan amount produces a payment in your budget. Subtract your down payment from that loan amount to find your maximum home price. This number is your affordability ceiling—not a target, but a boundary you should not cross.

Example: You earn $6,000 per month gross. Your car payment is $350. Your 28% housing limit is $1,680. Your 36% total debt limit is $2,160. Subtract your car payment: $2,160 − $350 = $1,810 available for housing. Property tax and insurance will cost roughly $400 per month on a $350,000 house. That leaves $1,410 for mortgage principal and interest. At 6.5% interest over 30 years, that payment supports a loan of about $215,000. With a 20% down payment, you can afford roughly $270,000.

Frequently Asked Questions

What if I earn irregular income or work on commission?

Lenders typically average your income over two years and may use only 75% of that average. If you earned $80,000 last year and $60,000 the year before, they might count only $52,500 (75% of the two-year average). This lowers your approval amount. Build a larger down payment or wait until you have two years of consistent income history to improve your approval odds.

Does my credit score affect how much house I can afford?

Credit score does not change the 28/36 rule, but it affects your interest rate. A score of 760+ might get you 6% interest, while a score of 620 might get you 7.5%. That 1.5% difference adds roughly $240 per month on a $240,000 loan. Improving your credit score before you shop can lower your rate and increase your affordability.

Should I use the 28% rule or aim lower?

The 28% rule is a lender's ceiling, not a personal recommendation. If you have student loans, aging parents you help support, or a history of living paycheck to paycheck, aim for 20% to 25% of gross income instead. This leaves more room for life to happen without forcing you to choose between a mortgage and other needs.

What if I have a co-borrower with separate income?

Lenders add both incomes together and apply the 28/36 rule to the combined total. If you earn $4,000 and your spouse earns $3,000, your combined gross is $7,000. Your housing limit is $1,960 (28% of $7,000). Both of your debts count toward the 36% total, so add them together before calculating your available housing budget.

Can I afford more house if I pay cash for a car instead of financing it?

Yes. If you eliminate a $350 car payment, that $350 becomes available for your housing payment under the 36% rule. On a $6,000 monthly income, paying off a car loan increases your housing budget by roughly $350 per month, which supports an additional $50,000 to $60,000 in home price (depending on interest rates).