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

Most lenders use the 28% rule as a starting point. If you earn $5,000 per month before taxes, your housing payment (mortgage, property tax, insurance, and homeowners association fees if applicable) should stay under $1,400. This is the threshold lenders check first, and exceeding it makes approval harder or impossible.

The second threshold is the 36% rule. Your total monthly debt payments — including the mortgage, car loans, credit cards, student loans, and any other obligations — should not exceed 36% of your gross income. On that same $5,000 monthly income, your total debt load should stay under $1,800. If you already carry $400 in car and student loan payments, your housing payment can only be $1,400 at most.

These are not laws. They are the lending standards that most banks, credit unions, and mortgage companies follow. Some lenders will go higher if you have a large down payment or an excellent credit score, and some will go lower if you have spotty credit or limited savings. But these two numbers are where the conversation starts.

Key Takeaways

  • Your housing payment should not exceed 28% of your gross monthly income, and your total debt payments should not exceed 36%.
  • The price you can afford depends on your down payment size, interest rate, loan term, and local property taxes — the same income supports different house prices in different places.
  • A mortgage pre-approval letter from a lender tells you the actual dollar amount they will lend you based on your income, credit, and savings.
  • Stretching to the maximum you are approved for leaves little room for home repairs, maintenance, or income loss.
  • Property taxes, insurance, and HOA fees vary widely by location and can add hundreds to your monthly payment.

How down payment size changes what you can afford

A larger down payment lowers your monthly payment because you are borrowing less money. If you put 20% down on a $300,000 house, you borrow $240,000. If you put 5% down, you borrow $285,000. The difference in monthly payment is roughly $300 to $400 depending on your interest rate.

Down payment size also affects whether you pay private mortgage insurance (PMI). If you put down less than 20%, most lenders require PMI, which is an extra monthly fee (usually 0.5% to 1% of the loan amount per year) that protects the lender if you stop paying. On a $285,000 loan, PMI might add $120 to $240 per month. Once you have paid down the loan to 80% of the home's original value, you can request to have PMI removed.

This means a household with $50,000 saved might afford a $250,000 house with a 20% down payment and no PMI, but only a $200,000 house if they put 10% down and pay PMI for years. The down payment you have directly limits the price range you should consider.

Interest rates and loan terms shift your budget significantly

A 1% difference in interest rate changes your monthly payment by roughly $100 per $100,000 borrowed. If you are approved for a 6% mortgage, your payment is higher than if you lock in a 5% rate on the same loan amount. Over 30 years, that 1% difference costs you tens of thousands of dollars in interest.

Loan term matters too. A 15-year mortgage has a higher monthly payment than a 30-year mortgage on the same amount borrowed, because you are paying it back faster. A $300,000 loan at 6% costs roughly $1,800 per month over 30 years but roughly $2,300 per month over 15 years. If your budget is tight, a 30-year loan lets you afford a higher price — but you pay more interest overall.

Before you decide what price range to target, check current mortgage rates with a lender or on a rate comparison site. Rates change weekly and directly affect how much house your income supports.

Property taxes and insurance vary by location and can exceed your mortgage payment

Your monthly housing payment includes four parts: principal and interest (the actual mortgage), property tax, homeowners insurance, and HOA fees if applicable. Lenders bundle these into one number called PITI (Principal, Interest, Taxes, Insurance).

Property tax rates vary dramatically by state and county. In some areas, property tax is 0.3% of the home's value per year; in others it is 1.5% or higher. On a $300,000 house, that difference is the gap between $750 per year and $4,500 per year. Homeowners insurance also varies by location, age of the home, and local risk (flood zones, hurricane areas, and high-crime neighborhoods cost more to insure).

This means the same household income supports a higher house price in a low-tax state than in a high-tax state. Before you settle on a target price, research the property tax rate and typical insurance cost in the specific neighborhood you are considering. A real estate agent or the county assessor's office can tell you the tax rate; insurance companies can quote you a rate based on the address.

Get a pre-approval letter to see what lenders will actually lend you

The 28% and 36% rules are guidelines, not guarantees. Your actual borrowing power depends on your credit score, income stability, savings, and debt history. A mortgage pre-approval letter from a lender tells you the exact dollar amount they will lend you.

To get pre-approved, contact a bank, credit union, or mortgage broker and provide recent pay stubs, tax returns (usually the last two years), bank statements, and a list of debts. The lender will check your credit score and run the numbers through their underwriting system. Within a few days, they will send you a letter stating the maximum loan amount you may have access to for.

Pre-approval is not a may provide of a loan — the lender will re-verify your income and credit before closing — but it is a realistic picture of what you can borrow. Use this number as your ceiling, not your target. Just because a lender will lend you $400,000 does not mean you should borrow it.

The difference between what you can afford and what you should afford

Lenders approve you based on income ratios, but they do not know your full financial picture. They do not know that your roof needs replacing in five years, or that you want to retire at 60, or that you have aging parents you help support. Stretching to the maximum you are approved for leaves almost no room for emergencies, home repairs, or a job loss.

A common mistake is buying at the top of your approved range and then discovering that property taxes, insurance, and maintenance cost far more than expected. A $400,000 house in an older neighborhood might need a $15,000 roof repair in year three. A $350,000 house in a flood zone might have insurance costs that rise sharply after a storm.

A safer approach is to aim for a house that costs 20% to 25% of your gross annual income, not the maximum 28% of your monthly payment. If you earn $100,000 per year, target a house in the $200,000 to $250,000 range, not the $350,000 to $400,000 range that the 28% rule might allow. This leaves breathing room for the unexpected.

How to calculate your personal affordability number

Start with your gross monthly income (before taxes). Multiply it by 0.28 to find your maximum housing payment under the 28% rule. Then subtract any monthly debt payments you already have (car loans, student loans, credit cards). The result is the maximum your mortgage, taxes, insurance, and HOA fees can total.

Next, research the property tax rate and typical insurance cost in the area where you want to buy. Add these to your calculation. If property tax is 1% of home value per year and insurance is $1,200 per year, a $300,000 house costs you $3,000 in tax and $1,200 in insurance annually, or roughly $350 per month combined. That leaves the rest of your $1,400 budget for the actual mortgage payment.

Use an online mortgage calculator to see what loan amount produces that monthly payment at current interest rates. That loan amount, plus your down payment, is the house price you can afford. If the number feels uncomfortably high, lower your target price. You are not required to spend the maximum.

Frequently Asked Questions

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

Lenders add both incomes together to calculate the 28% and 36% thresholds. If you earn $60,000 and your spouse earns $40,000, your combined gross income is $100,000 per year. However, if one of you plans to leave the workforce (for parental leave, career change, or retirement), calculate affordability on a single income to be safe.

Does my credit score affect how much I can borrow?

Yes. A credit score above 740 typically qualifies you for the lowest interest rates. Scores between 680 and 740 may result in a higher rate. Scores below 680 make approval harder and more expensive. A higher interest rate means a higher monthly payment on the same loan amount, so improving your credit before applying can lower your monthly cost.

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 over that period if it fluctuates. Some require a CPA letter confirming your income. Start the pre-approval process early so you know what documentation the lender needs.

What if I have a large inheritance or bonus coming?

Lenders typically count only income that is stable and recurring. A one-time bonus or inheritance does not increase your borrowing power under the 28% and 36% rules, though you can use it as a down payment. If you receive regular bonuses (documented in your employment contract), some lenders will count a percentage of it toward your income.

Should I buy the maximum house I am approved for?

No. Approval is based on income ratios alone and does not account for your other goals, emergency savings, or unexpected costs. Buying 20% to 25% below your maximum approval gives you financial flexibility and reduces stress if your income drops or a major repair is needed.