The basic rule: your monthly housing payment should not exceed 28% of your gross monthly income

Lenders use a number called the front-end ratio to decide how much house they will finance. It works like this: take your gross monthly income (before taxes), multiply by 0.28, and that is the maximum monthly payment most lenders will allow for mortgage, property taxes, homeowners insurance, and HOA fees combined.

If you earn $60,000 a year, your gross monthly income is $5,000. Twenty-eight percent of that is $1,400. That is your ceiling for all housing costs each month. The actual house price you can afford depends on your down payment, your interest rate, and your loan term—but the monthly payment is what the lender cares about first.

This rule exists because lenders have decades of data showing that people who spend more than 28% of income on housing are more likely to default. It is not a suggestion; it is the boundary most conventional loans will not cross.

Key Takeaways

  • Lenders cap your housing payment at 28% of your gross monthly income, which includes mortgage, taxes, insurance, and HOA fees.
  • Your actual house price depends on your down payment size, interest rate, and loan length—a larger down payment lets you buy a more expensive house with the same monthly payment.
  • Your total debt payments (housing plus car loans, credit cards, student loans) cannot exceed 43% of gross income under most lending rules.
  • The price you can afford is not the same as the price a lender will offer—lenders sometimes approve loans that stretch your budget dangerously thin.

How your down payment changes the house price you can afford

The 28% rule sets your monthly payment. Your down payment determines what house price that payment buys. A larger down payment means you borrow less, so your monthly payment is smaller—or you can borrow the same amount and buy a more expensive house.

If you have $1,400 a month to spend and you put down 20%, you can afford a different house than if you put down 5%. The difference is real: a 20% down payment on a $300,000 house is $60,000. A 5% down payment is $15,000. With the same monthly payment, the 20% down buyer can afford a house around $375,000 to $400,000, depending on rates and loan length.

Down payment size also affects your interest rate and whether you pay mortgage insurance. Loans with less than 20% down usually require PMI (private mortgage insurance), which adds $100 to $300 a month to your payment depending on the loan size. That PMI counts toward your 28% ceiling, so it reduces the house price you can afford.

What lenders actually check: the 43% back-end ratio

The 28% front-end ratio is only half the story. Lenders also look at your back-end ratio, which is all your monthly debt payments divided by gross income. This includes your mortgage payment, car loans, student loans, credit card minimums, child support, and any other debt obligation. The limit is usually 43%.

If you earn $5,000 a month and you already have a $400 car payment and $200 in student loan payments, you have $600 in existing debt. That leaves you $2,150 for a housing payment (43% of $5,000 is $2,150). But your front-end ratio says you can only spend $1,400 on housing. The front-end ratio wins—you are capped at $1,400.

High existing debt is the most common reason a lender approves you for less house than the 28% rule would suggest. If you are carrying credit card balances or a large car loan, paying those down before you apply for a mortgage will increase your buying power.

The difference between what you can afford and what a lender will approve

A lender will sometimes approve you for more than you should actually spend. Lenders make money from interest, so they have an incentive to approve larger loans. Just because a lender says you can afford a $450,000 house does not mean you should buy one.

The 28% rule is a floor, not a ceiling for safety. Many financial advisors recommend staying at 25% or even 20% of gross income if you have other financial goals—saving for retirement, building an emergency fund, or paying for children's education. A house that takes 28% of your income leaves less room for those things.

Before you accept a lender's approval amount, ask yourself: if my interest rate goes up, if my property taxes increase, or if I lose income, can I still make this payment? If the answer is no, the house is too expensive, even if the lender says yes.

How interest rates and loan length affect the price you can afford

Your monthly payment depends on three things: the loan amount, the interest rate, and how many years you have to pay it back. A lower interest rate or a longer loan term means a smaller monthly payment, which means you can afford a more expensive house with the same $1,400 ceiling.

Interest rates change constantly and vary by lender, credit score, and loan type. A 30-year loan at 6% produces a different monthly payment than a 30-year loan at 7%, and both are different from a 15-year loan at 6%. You cannot know your exact affordability until you get a rate quote from a lender.

Longer loan terms (30 years instead of 15) lower your monthly payment but cost more in total interest over the life of the loan. Shorter terms cost less in interest but require a higher monthly payment. The house price you can afford is the same either way—your monthly budget is fixed at 28% of income. The choice is whether to pay off the house faster or slower.

How property taxes and insurance affect your actual buying power

Your 28% ceiling includes not just the mortgage payment but also property taxes, homeowners insurance, and HOA fees if the property has them. These vary widely by location and property type, and they directly reduce the amount you can borrow.

Property taxes range from less than 0.5% of home value per year in some states to over 2% in others. A $300,000 house in a high-tax state might have $6,000 a year in property taxes ($500 a month), while the same house in a low-tax state might have $1,500 a year ($125 a month). That $375 difference in monthly taxes comes straight out of your borrowing power.

Homeowners insurance also varies by location, home age, and claims history. Coastal areas and older homes cost more to insure. Before you decide what house price you can afford, get a property tax estimate for the specific neighborhood and an insurance quote for a house at that price point. These numbers are not guesses—they are real costs that reduce your buying power.

Using a mortgage calculator to find your actual number

The math is straightforward but tedious to do by hand. A mortgage calculator takes your income, down payment, interest rate, and loan term and shows you the house price you can afford. Most lenders offer free calculators on their websites, and many do not require you to enter personal information.

To use a calculator accurately, you need: your gross annual income, the down payment amount you have saved, the interest rate you expect (ask a lender or check current rates online), the loan term you are considering (usually 15 or 30 years), and estimates for property taxes and insurance in the area where you want to buy. Plug those numbers in, and the calculator shows you the maximum loan amount and house price.

Run the calculation at different interest rates and down payment amounts. This shows you how sensitive your buying power is to each variable. If a 1% interest rate increase drops your affordable house price by $50,000, you know that rate risk matters. If a larger down payment barely changes the price, you know your constraint is the monthly payment, not the loan amount.

Frequently Asked Questions

What if I have a co-borrower or spouse with income?

Lenders add both incomes together to calculate the 28% and 43% ratios. If you earn $60,000 and your spouse earns $40,000, your combined gross income is $100,000, and your housing payment ceiling is $2,333 per month. Both of your debts count toward the 43% ratio, so high debt on either side reduces your buying power.

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

Credit score does not change the 28% and 43% rules, but it affects the interest rate you receive. A higher score gets a lower rate, which means a smaller monthly payment for the same loan amount—or the same monthly payment for a larger loan. The difference can be significant: a 0.5% rate difference on a $300,000 loan changes your monthly payment by roughly $150.

Can I afford a house if I am self-employed?

Yes, but lenders require more documentation. Most want to see two years of tax returns and may average your income across those years if it varies. Some use a lower income figure if your business is new or declining. Talk to a lender early to understand what income number they will use before you start house hunting.

What if I want to spend less than 28% of my income on housing?

That is a smart financial move. Spending 20% to 25% of income on housing leaves more room for savings, retirement contributions, and other goals. Use the same calculator but set your target payment at 20% or 25% of income instead of 28%. This gives you a more conservative house price and more financial breathing room.

Should I get pre-approved before I start looking at houses?

Yes. Pre-approval tells you the actual loan amount a lender will offer based on your income, debts, and credit score. It is different from a pre-qualification, which is just an estimate. Pre-approval takes a few days and requires documentation, but it shows sellers you are a serious buyer and prevents you from falling in love with a house you cannot actually afford.