Start with your gross monthly income and the 28/36 rule

The most common measure is the 28/36 rule. Your housing payment (mortgage, property tax, insurance, and homeowners association fees if you have them) should not exceed 28% of your gross monthly income — the money you earn before taxes. Your total debt payments, including the mortgage, car loans, credit cards, and student loans, should not exceed 36% of gross income.

If you earn $5,000 per month gross, the 28% rule suggests a housing payment around $1,400. That is the ceiling most lenders use, though some will go higher if your credit is strong and you have little other debt. The 36% rule means your total monthly debt should stay under $1,800.

This rule exists because it reflects what lenders have learned over decades: people who stay within these bounds are far less likely to default. It is not a law, and different lenders weight it differently, but it is the standard starting point for any conversation about affordability.

Key Takeaways

  • The 28/36 rule limits your housing payment to 28% of gross monthly income and total debt to 36%, which is what most lenders use to decide how much to lend.
  • Your actual affordability depends on your down payment, interest rate, property taxes, insurance, and whether you have other debts — not just your income.
  • A mortgage pre-approval shows what a lender will lend, not what you can safely afford; lenders often approve amounts that leave little room for emergencies or income loss.
  • Your monthly payment covers principal, interest, taxes, insurance, and possibly mortgage insurance — each one changes the total you can afford.
  • Saving for emergencies and retirement should happen alongside your mortgage payment, so your true affordability is lower than what lenders will approve.

How down payment size changes what you can afford

A larger down payment lowers your monthly payment because you are borrowing less. It also removes the requirement for private mortgage insurance (PMI), which protects the lender if you default. PMI typically costs 0.5% to 1% of your loan amount per year, added to your monthly payment.

If you put down 20%, you avoid PMI entirely. If you put down 10%, you pay PMI on top of your mortgage payment. If you put down 3%, PMI is higher. On a $300,000 home with 10% down, PMI might add $150 to $250 per month. That same home with 20% down eliminates that cost.

This means two people with identical incomes can afford different purchase prices depending on how much they have saved. Someone with $60,000 saved can put 20% down on a $300,000 home. Someone with $15,000 can only put 5% down on a $300,000 home, which means a higher monthly payment due to PMI and a larger loan amount.

Interest rates and loan terms reshape your budget

A lower interest rate means a lower monthly payment on the same loan amount. A 30-year mortgage at 6% costs less per month than a 30-year mortgage at 7%, even though you pay more interest over the life of the loan. A 15-year mortgage at 6% costs more per month than a 30-year at 6%, because you are paying off the debt faster.

Interest rates change based on market conditions, your credit score, and the type of loan. Someone with a 750 credit score might get 6.2%, while someone with a 650 score might get 7.1% on the same day. That difference adds up to hundreds of dollars per month on a $300,000 loan.

Before you decide how much house you can afford, get a rate quote from at least two lenders. The difference between lenders can be 0.25% to 0.5%, which translates to $50 to $150 per month. Over 30 years, that is $18,000 to $54,000.

Property taxes and insurance are part of your payment

Your monthly mortgage payment includes principal and interest, but it also includes property taxes and homeowners insurance, which are held in an escrow account by the lender and paid on your behalf. These vary wildly by location. Property taxes in New Jersey run much higher than in Texas. Insurance costs more in hurricane zones than in the Midwest.

A $300,000 home in a low-tax area might have $200 per month in taxes and insurance combined. The same home in a high-tax area might have $400 per month. That $200 difference means you can afford a lower purchase price in the high-tax area if you want to stay within the 28% rule.

Before you settle on a purchase price, research the property tax rate and average insurance cost in the specific neighborhood. Your real estate agent or the county assessor can tell you the tax rate. Insurance companies can give you a quote based on the address and home details.

Existing debt shrinks the house payment you can afford

The 36% rule accounts for all debt, not just the mortgage. If you have a $400 car payment, $150 in student loan payments, and $100 in credit card minimums, that is $650 per month already committed. On a $5,000 gross income, 36% is $1,800. Subtract the $650, and you have $1,150 left for your housing payment.

This is why paying off debt before buying a home increases your buying power. Someone who eliminates a $400 car payment gains $400 per month in housing budget. Over a 30-year mortgage, that difference might mean a $60,000 to $80,000 higher purchase price.

If you are carrying debt, be honest about it when you calculate affordability. Lenders will see it on your credit report, and it will reduce the amount they approve you for. The 28/36 rule accounts for this, but only if you include all your debts in the calculation.

Pre-approval is not the same as affordability

A mortgage pre-approval is a lender's estimate of how much they will lend you based on your income, credit, and debts. It is not a statement of what you can safely afford. Lenders often approve amounts that leave little cushion for emergencies, job loss, or unexpected home repairs.

If a lender pre-approves you for $450,000, that does not mean you should spend $450,000. It means the lender believes you can make the payment based on your current income and debts. It does not account for the fact that you might lose your job, face a medical emergency, or discover your roof needs replacement.

A safer approach is to use the 28% rule as your ceiling, then subtract 10% to 20% as a buffer. If the 28% rule says you can afford $1,400 per month, aim for $1,120 to $1,260. That leaves room for life to happen without forcing you to choose between your mortgage and your emergency fund.

Build in room for maintenance, repairs, and emergencies

Homeownership costs more than just the mortgage payment. The roof will need replacement. The water heater will fail. The foundation might crack. The general rule is to budget 1% of the home's purchase price per year for maintenance and repairs, though older homes cost more and newer ones cost less.

On a $300,000 home, that is $3,000 per year, or $250 per month. If your mortgage payment is $1,400, your true housing cost is closer to $1,650 when you account for maintenance. That changes what you can afford if you are trying to stay within the 28% rule.

This is why your affordability calculation should include a line for emergency savings and maintenance reserves. If you can only afford the mortgage payment with nothing left over, you cannot afford the house. You need income left after the payment to cover repairs, property taxes that rise over time, and insurance increases.

Frequently Asked Questions

What if I make irregular income or work on commission?

Lenders typically average your income over the past two years. If you are self-employed or work on commission, bring two years of tax returns and profit-and-loss statements. Some lenders will use your average; others will use a lower number if your income is declining. Be conservative in your own calculation — use your lowest recent year, not your best.

Does my credit score affect how much I can afford?

Your credit score affects the interest rate you receive, which changes your monthly payment. A higher score gets a lower rate. The difference between a 700 score and a 750 score might be 0.3% to 0.5%, which adds up to $75 to $150 per month on a $300,000 loan. Improving your credit before you apply can lower your payment and increase your buying power.

Can I afford a house if I have student loans?

Yes, but they reduce your available budget. Lenders count student loan payments toward your 36% debt limit. If you are on an income-driven repayment plan, lenders use the actual payment amount. If you have not started repayment yet, they may estimate a payment based on your loan balance. Pay down student loans before buying if you can, or factor the payment into your affordability calculation.

What if my spouse and I have different incomes?

Lenders can count both incomes if you are both on the mortgage. They will use both your credit scores and both your debt loads. The 28% and 36% rules apply to your combined gross income. If one spouse loses a job, you should still be able to afford the payment on the remaining income — so calculate affordability based on the lower income as a safety measure.

Should I use a 15-year or 30-year mortgage?

A 15-year mortgage has a higher monthly payment but costs far less in interest over time. A 30-year mortgage has a lower payment but costs more in total interest. Use the 28% rule on your gross income to find your maximum payment, then work backward to see what purchase price each option supports. Choose based on what you can afford monthly while still saving for emergencies and retirement.