The basic rule: 28 percent of gross income for housing costs

Most lenders use a straightforward calculation: your monthly housing payment should not exceed 28 percent of your gross monthly income. Gross income is what you earn before taxes and deductions. This includes your salary, bonuses, rental income, or other regular money coming in.

If you earn $60,000 per year, your gross monthly income is $5,000. Twenty-eight percent of that is $1,400. That $1,400 covers your mortgage payment, property taxes, homeowners insurance, and mortgage insurance if you put down less than 20 percent. It does not include utilities, maintenance, or other costs of owning a home.

This 28 percent rule exists because lenders have decades of data showing which borrowers default. It is not a law — it is a lending standard. Some lenders will go higher, and some will go lower, depending on your credit score, down payment, and debt history.

Key Takeaways

  • Your housing payment should stay at or below 28 percent of your gross monthly income, which is what lenders use to set a maximum loan amount.
  • The actual price you can afford depends on your down payment size, local property taxes and insurance rates, and the interest rate you lock in.
  • A second debt rule — your total monthly debt payments should not exceed 36 percent of gross income — can lower your maximum house price if you carry car loans, student loans, or credit card balances.
  • Online calculators can estimate a price range, but a mortgage lender can give you a firm number after reviewing your income, debts, and credit.
  • Affording a house payment is different from affording to own the house; budget for property taxes, insurance, maintenance, and utilities before you buy.

How down payment size changes the price you can afford

The larger your down payment, the smaller your monthly payment, and the more expensive a house you can buy within that 28 percent limit. A down payment is the cash you pay upfront; the rest is borrowed.

Say you can afford a $1,400 monthly payment. With a 20 percent down payment and a 7 percent interest rate over 30 years, you can borrow roughly $200,000, which means you can buy a $250,000 house. With a 10 percent down payment on the same house price, your monthly payment jumps to about $1,800 — over your 28 percent limit. To stay within $1,400, you would need to buy a house around $200,000 instead.

If you put down only 3 percent, you will also pay private mortgage insurance (PMI), which is an extra monthly fee that protects the lender if you default. PMI typically costs 0.5 to 1 percent of the loan amount per year, split into monthly payments. This fee disappears once you reach 20 percent equity in the home, but it raises your monthly cost in the early years.

The second debt rule: your total obligations matter

Lenders also look at your debt-to-income ratio, which is all your monthly debt payments divided by your gross monthly income. This includes your car payment, student loans, credit card minimums, child support, and the new mortgage payment. Most lenders want this total to stay at or below 36 percent of gross income.

If you earn $5,000 per month and already pay $800 toward a car loan and $300 toward student loans, you have $1,100 in existing debt. That leaves you $700 for a mortgage payment to stay within the 36 percent rule ($5,000 × 0.36 = $1,800 total; $1,800 − $1,100 = $700). This is lower than the 28 percent housing-only rule would allow, so the debt rule becomes your limiting factor.

Paying down or paying off existing debts before you buy a house directly increases the mortgage payment you can afford. This is one reason some people delay a home purchase to finish a car loan or student loan.

Interest rates and loan terms shift the price significantly

The interest rate you receive depends on market conditions, your credit score, and the loan type. A higher rate means a higher monthly payment on the same loan amount, which shrinks the price you can afford.

At a 6 percent interest rate over 30 years, a $200,000 loan costs about $1,199 per month. At 8 percent, the same loan costs about $1,467 per month — a $268 difference. If your 28 percent limit is $1,400, the higher rate means you can only borrow about $190,000 instead of $200,000.

Loan term also matters. 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 is more common because it keeps the monthly payment lower, which helps you stay within the 28 percent rule on a larger house price.

Property taxes and insurance vary by location and change your real affordability

The 28 percent rule includes property taxes and homeowners insurance, not just the mortgage payment itself. These costs vary widely by state and county, which means the same house price is more or less affordable depending on where you live.

A $300,000 house in a low-tax state like Texas or Florida might have annual property taxes of $3,000 to $4,000. The same house in a high-tax state like New Jersey or Illinois could have annual property taxes of $6,000 to $8,000 or more. That difference of $250 to $350 per month comes straight out of your borrowing power.

Homeowners insurance also varies by location, home age, and the insurer. Coastal areas with hurricane risk pay more. Older homes with outdated electrical or plumbing systems pay more. Get quotes from local insurers before you settle on a price range, because the cost is real and it reduces how much house you can afford.

How to estimate your price range before talking to a lender

Start with your gross monthly income and multiply by 0.28 to find your maximum housing payment. Then subtract your property tax and insurance estimates to find your maximum mortgage payment. Online mortgage calculators can then show you what loan amount that payment supports, based on your down payment and the current interest rate.

For example: You earn $72,000 per year ($6,000 per month). Twenty-eight percent is $1,680. Your local property taxes and insurance estimate is $400 per month. That leaves $1,280 for the mortgage payment itself. At 7 percent interest over 30 years with a 20 percent down payment, $1,280 per month supports a loan of roughly $183,000. Add your down payment — if you have $50,000 saved, that is a 20 percent down payment on a $250,000 house.

This is a rough estimate. Interest rates change daily, and lenders may offer you a different rate based on your credit score. A mortgage lender can give you a firm number after reviewing your actual income documents, debts, and credit report.

What you can afford to pay is not the same as what you can afford to own

The mortgage payment is only one cost of owning a home. Property taxes, insurance, utilities, maintenance, and repairs are separate. A house you can afford to buy may not be a house you can afford to live in.

Budget for property maintenance at roughly 1 percent of the home's value per year. A $300,000 house should have $3,000 per year ($250 per month) set aside for repairs and upkeep. Add utilities — electricity, gas, water, sewer, trash — which vary by climate and home size but often run $150 to $300 per month. If you have a mortgage, you may also pay homeowners association fees if the property is in a planned community.

A realistic affordability number includes all these costs, not just the mortgage. If your total housing costs — mortgage, taxes, insurance, utilities, and maintenance — exceed 35 to 40 percent of your gross income, you may struggle to cover other expenses like food, transportation, and savings.

Frequently Asked Questions

What credit score do I need to get a mortgage?

Most conventional lenders require a credit score of at least 620, but scores of 740 or higher typically may have access to for the best interest rates. FHA loans, which are backed by the Federal Housing Administration, may accept scores as low as 580. Your score affects the rate you receive, which directly changes how much house you can afford.

Can I use income from a second job or side work?

Yes, but lenders have rules about how recent it must be. Most require two years of tax returns showing the income. If you have been self-employed or freelancing for less than two years, lenders may not count it yet. Ask your lender which income sources they will include before you count on them.

Does getting pre-approved mean I can definitely borrow that amount?

Pre-approval is a conditional offer based on the information you provided and a soft credit check. The final approval comes after the lender verifies your income documents, orders a home appraisal, and does a hard credit check. If your financial situation changes — a job loss, a new debt, or a drop in credit score — the final approval can be lower or denied.

What if I want to buy a more expensive house than the 28 percent rule allows?

Some lenders will go up to 40 or 43 percent of gross income if you have a large down payment, excellent credit, and low existing debt. However, this leaves less room in your budget for other expenses and increases your risk of financial strain if your income drops or unexpected costs arise.

Should I max out what lenders say I can afford?

No. Just because a lender will loan you $400,000 does not mean you should borrow it. Consider your job stability, whether you want to save for retirement and education, and whether you can cover maintenance and repairs. Many financial advisors recommend staying below the 28 percent limit to leave breathing room in your budget.