“How much house can you afford?” is really two questions: what a lender will approve, and what fits a household’s actual monthly life — the one that decides whether a home feels comfortable or tight for years. This guide explains the guideline lenders start from, the costs beyond the mortgage payment, and how to run personal numbers before viewing a single listing. The worked example uses round, hypothetical numbers to show the method; they are not a quote, a prediction, or advice for any individual household.
The 28/36 Guideline, in Plain Language
A long-used starting point in mortgage lending is the 28/36 guideline. It has two parts:
- The 28 part (housing ratio): total monthly housing costs should be no more than about 28% of gross monthly income — income before tax and deductions.
- The 36 part (total debt ratio): all monthly debt payments combined — housing plus car payments, student loans, credit card minimums, and other recurring debts — should be no more than about 36% of gross monthly income.
Housing costs in the 28% figure mean more than the loan payment: principal and interest, property taxes, homeowners insurance, and, where they apply, HOA dues and mortgage insurance. That is where many first estimates go wrong — a payment that looks affordable alone can break the guideline once taxes and insurance are added.
The guideline is a starting frame, not a law. Lenders may approve ratios above it; some households live well below it. Its value is a quick, honest sense-check before emotions and listings take over.
How Lenders Actually Look at Debt-to-Income
Lenders calculate debt-to-income ratio (DTI) from documented income and the debts on a credit report and application, counting minimum required payments rather than anything extra a borrower chooses to pay. They also look beyond DTI — credit history, savings reserves, employment stability, and the property itself — which is why two households with the same income can receive different answers.
Two consequences follow. Paying down a recurring debt before applying improves the ratio in a way a one-off expense does not. And a new monthly payment taken on shortly before buying — a car loan, for example — reduces the housing budget a lender will support, even if the household feels it can manage both.
A Hypothetical Worked Example
The following is a hypothetical example with round numbers, included only to show the method. It is not a quote, an offer, or a prediction of any real household’s approval.
Suppose a household earns $96,000 a year in gross income — $8,000 a month.
- 28% housing limit: $8,000 × 0.28 = $2,240 a month for total housing costs.
- 36% total debt limit: $8,000 × 0.36 = $2,880 a month for housing plus all other debts.
- Suppose the household has a $400 car payment and $100 in other minimum debt payments — $500 total. Under the 36% limit, that leaves $2,880 − $500 = $2,380 for housing. The tighter limit is the 28% figure, so the working housing budget is $2,240 a month — for everything, not just principal and interest.
Now suppose taxes, insurance, and any HOA dues locally come to roughly $540 a month. The amount left for principal and interest is $2,240 − $540 = $1,700 a month. That $1,700 figure — not the $2,240 headline — determines the loan size, and therefore the price range once a down payment is added.
Every household runs the same steps with its own income, debts, and local figures. The method matters more than any single number.
The Costs Beyond the Mortgage Payment
A monthly housing budget must hold all of the following, not just the loan:
- Property taxes, which vary widely by location and are often paid monthly into escrow as part of the payment.
- Homeowners insurance, required by lenders and priced by location, construction, and coverage.
- HOA or condo dues, where they apply, which can be a substantial monthly sum in some developments.
- Mortgage insurance, commonly required when the down payment is below 20%.
- Maintenance and repairs, which no lender counts but every owner pays. A common budgeting habit is to set aside a regular monthly amount rather than treating each bill as a surprise.
The guide to the hidden costs of buying a house works through these extras in detail; they belong in the affordability calculation from the start, not as an afterthought once a price is agreed.
How the Down Payment Changes the Answer
The down payment changes affordability in three ways: a larger deposit means a smaller loan and a lower monthly payment at the same price; it can remove mortgage insurance at 20%, cutting another monthly cost; and it reduces the interest paid over the life of the loan.
The trade-off is cash: money used as a down payment is no longer an emergency reserve, and a household that spends every saved dollar at closing starts ownership exposed. Buyers with a smaller deposit are not out of options — the guide to how to buy a house with a low down payment explains the main routes — but a smaller deposit makes the monthly maths tighter, so the 28/36 sense-check matters more, not less.
Approved Is Not the Same as Affordable
A lender’s maximum approval comes from documents, ratios, and risk models. It does not know what a household spends on childcare, travel, food, or saving for retirement. A household can therefore be approved for a payment that leaves no slack for the life it actually lives — and the approval letter will not warn it.
A useful personal test is to run the proposed housing cost against the current budget: what would have to shrink to make room for it, and is that still the right trade in a month containing a car repair and a heating bill? Households that “try out” a higher payment first — saving the difference between current and proposed housing costs for a few months — learn their real comfort level with evidence, and build savings in the process.
Steps to Run Your Own Numbers
- Write down gross monthly income (before tax).
- Multiply by 0.28 for the housing-cost ceiling, and by 0.36 for the all-debts ceiling.
- List every recurring debt payment at its required minimum and subtract the total from the 36% figure. The lower result is the working housing budget.
- Estimate local taxes, insurance, and any HOA dues, and subtract them. What remains is the principal-and-interest budget.
- Test that payment against real monthly spending, including maintenance savings and an emergency reserve.
- Decide the down payment with the reserve in mind, then look at listings whose total monthly cost fits the number — not the other way around.
Key Points at a Glance
- 28%: total housing costs (payment, taxes, insurance, HOA, mortgage insurance) as a share of gross monthly income
- 36%: housing plus all other monthly debt payments, same basis
- Lenders count required minimum payments and documented income; personal spending does not enter their maths
- The down payment lowers the payment and can remove mortgage insurance, but should not empty the reserve
- Approval ≠ comfort: the household’s own budget test is the final check
Frequently Asked Questions
What is the 28/36 rule for buying a house?
It is a guideline: total monthly housing costs at or below about 28% of gross monthly income, and all monthly debt payments combined at or below about 36%. Lenders use versions of it as a starting point; it is not a legal limit.
Does the 28% figure include taxes and insurance?
Yes. The housing figure covers principal, interest, property taxes, homeowners insurance, and where applicable HOA dues and mortgage insurance — not just the loan payment.
How do lenders calculate debt-to-income ratio?
They divide total required monthly debt payments by gross monthly income, using documented income and minimum payments from the credit report and application. Credit history, reserves, and the property also affect approval.
Is being approved for a loan the same as affording the house?
No. Approval reflects a lender’s risk calculations, not a household’s real spending on childcare, food, travel, or saving. A payment can be approvable and still leave a household uncomfortably stretched.
How does a bigger down payment help affordability?
It shrinks the loan and the monthly payment, can remove mortgage insurance at 20%, and reduces total interest paid. The balance to strike is keeping an emergency reserve after closing.
What costs do buyers most often forget in the maths?
Taxes and insurance inside the monthly figure, HOA dues, mortgage insurance on smaller down payments, and maintenance.
This article is general information, not financial advice.
