How Much House Can You Afford? The 28/36 Rule, Worked Out

There are two answers to this question: what a lender will approve, and what you can carry without the house owning you. Lenders answer with the 28/36 rule: housing costs up to 28% of gross monthly income, and all debt payments combined up to 36%. Your own answer should usually sit below both numbers — this guide works through why, with real arithmetic.

The number lenders actually check: DTI

Debt-to-income ratio (DTI) is your monthly debt obligations divided by gross (pre-tax) monthly income. It comes in two flavors:

• Front-end DTI (the 28): just the housing payment — and that means the full PITI: principal, interest, property taxes, and homeowners insurance, plus HOA dues and PMI if they apply. Not just the loan payment.
• Back-end DTI (the 36): PITI plus every other required payment — car loans, student loans, credit-card minimums, personal loans. Utilities, groceries, and subscriptions don't count here, which is exactly why the lender's ceiling can exceed your real-life comfort.

In practice many loans close above 36% — conventional underwriting can stretch toward the mid-40s with strong credit and reserves. Treat that flexibility as the lender protecting their downside, not endorsing your budget.

Worked example: $100,000 salary

Gross monthly income: $8,333. Suppose you carry a $400 car payment and $150 in student-loan minimums.

1. Front-end cap: 28% × $8,333 = $2,333 for total housing (PITI).
2. Back-end cap: 36% × $8,333 = $3,000 for all debts; minus the $550 of existing payments leaves $2,450 for housing. The binding limit is the smaller one: $2,333.
3. Strip out taxes and insurance: assume roughly $550/month for property tax and insurance (this varies enormously by state — Texas and New Jersey property taxes can double it). That leaves about $1,780 for principal and interest.
4. Convert to a loan amount: at an illustrative 6.5% rate on a 30-year fixed, every $100,000 borrowed costs about $632/month, so $1,780 supports roughly a $280,000 loan.
5. Add your down payment: with $70,000 down (20%), that's about a $350,000 house with no PMI. With 10% down instead, the price ceiling drops toward $310,000 and PMI eats part of the budget until you reach 20% equity.

Open this example in the mortgage calculator — the $350,000 price, $70,000 down, 6.5% over 30 years, and the $8,333 gross monthly income are already filled in, so you can change one number at a time and watch the housing ratio move.

Two things to notice. First, existing debt directly shrinks the house: every $100 of monthly payments removes roughly $16,000 of loan at these rates — paying off a $400 car payment "buys" about $63,000 of house. Second, rates dominate: a one-point rate move shifts what the same payment buys by roughly 10%, dwarfing most price negotiations.

Why your ceiling should be lower than the bank's

• The 28% is on gross, but you live on net. A $2,333 housing payment is 28% of gross on a $100,000 salary — but closer to 38% of take-home after taxes and a 401(k) contribution. Run your actual paycheck before anchoring on the lender's number.
• Ownership costs don't stop at PITI. Budget roughly 1–2% of the home's value per year for maintenance and repairs, plus utilities that typically run higher than a rental's.
• Cash at closing goes beyond the down payment. Closing costs run about 2–5% of the loan, and you still want an intact emergency fund on the other side of the purchase — a house is the worst possible reason to start homeownership with $0 in reserves.
• A simple personal test: if the full PITI fits inside the "needs" half of a 50/30/20 budget alongside your other essentials, the house fits your life, not just your application.

How to raise what you can afford

• Clear a monthly payment before applying — it helps DTI far more than the same cash sitting in savings.
• Improve the rate: credit score, shopping 3+ lenders, and points all move the payment-per-$100k; even 0.25% matters over 30 years.
• Reach 20% down to drop PMI — or if you can't, price the PMI honestly into the budget rather than ignoring it.
• Don't stretch the term casually: a longer or interest-heavy structure raises the price you "afford" today at the cost of decades of interest.

Run your numbers

Model the full payment — P&I, taxes, insurance, PMI, and HOA — with the US Mortgage Calculator, and get your true take-home for the net-income test with the US Paycheck Calculator. If you already own and rates have moved, the Refinance Calculator shows whether a new rate frees up budget. This is general education, not personalized financial advice.