Start with your gross monthly income, then subtract what you already owe
Lenders use two ratios to decide how much you can borrow. The first is your front-end ratio: your monthly mortgage payment (including property tax, insurance, and homeowners association fees if you have them) should not exceed 28% of your gross monthly income. The second is your back-end ratio: your total monthly debt payments—mortgage, car loans, credit cards, student loans, everything—should not exceed 36% to 43% of gross income, depending on the lender.
To find your number, start with your gross monthly income (what you earn before taxes). Multiply it by 0.28 to find the maximum your lender will allow for housing costs alone. Then look at all your other monthly debt: car payments, minimum credit card payments, student loan payments, personal loans. Add those up. Subtract that total from 36% of your gross income. The result is what lenders will allow for your mortgage payment.
Example: You earn $5,000 gross per month. Twenty-eight percent is $1,400—that is your housing ceiling. Your other debts total $400 per month. Thirty-six percent of $5,000 is $1,800. Subtract $400 from $1,800 and you get $1,400. Both ratios point to the same number: $1,400 per month for housing costs.
Key Takeaways
- Lenders cap your housing payment at 28% of gross monthly income and your total debt at 36% to 43% of gross income.
- Your housing payment includes the loan itself, property tax, homeowners insurance, and HOA fees—not just the principal and interest.
- Existing debt (car loans, credit cards, student loans) directly reduces how much house payment a lender will approve.
- What a lender will approve and what you can actually afford to pay without financial stress are two different numbers.
What counts as your housing payment
When a lender calculates your 28% ratio, they are not looking at just the loan payment. They include four things: principal and interest on the mortgage, property tax, homeowners insurance, and homeowners association fees if you pay one. This bundle is sometimes called PITI (principal, interest, tax, insurance).
Property tax varies by location and home value. Homeowners insurance varies by location, home age, and coverage level. If you do not know these numbers yet, lenders use estimates based on the home price and zip code. Once you have an actual property under contract, the numbers get more precise.
If you put down less than 20%, you will also pay private mortgage insurance (PMI)—a monthly fee that protects the lender if you default. This fee is part of your payment and counts toward the 28% ratio. PMI typically runs 0.5% to 1% of the loan amount per year, divided into monthly payments.
The difference between what you can borrow and what you can afford
A lender's approval is not the same as your personal comfort zone. A lender looks at income and debt ratios. You have to live on what is left after the payment goes out.
If you are approved for a $1,400 monthly payment but you have irregular income, upcoming medical expenses, aging parents you help support, or a job that might change, you may want to aim lower. A common rule of thumb is to keep your housing payment to no more than 25% to 30% of gross income—below the lender's 28% ceiling—so you have breathing room for emergencies and life changes.
Run the numbers both ways: what the lender will approve, and what leaves you with a comfortable cushion. The lower number is the one to use when you start looking.
How to calculate the actual loan amount from a monthly payment
Once you know your target monthly payment, you can work backward to find how much you can borrow. This requires knowing the interest rate and loan term (usually 30 years, sometimes 15 or 20).
The simplest approach is to use a mortgage calculator—enter your target payment, the interest rate, and the loan term, and it will show you the loan amount. Most lenders and real estate websites have free calculators.
If you want to do it by hand: a 30-year mortgage at 7% interest costs about $6.65 per month for every $1,000 borrowed. At 6%, it costs about $6.00 per month per $1,000. At 8%, it costs about $7.34. These are rough figures and change with rates, but they let you estimate quickly. If your target payment is $1,400 and rates are 7%, divide $1,400 by $6.65 and multiply by 1,000. That gives you roughly $210,000 in borrowing power—before property tax, insurance, and PMI are added in.
What happens if you have high existing debt
If you carry significant credit card balances, car loans, or student loans, those payments shrink your mortgage approval. A $400 car payment and a $200 minimum on credit cards means you lose $600 from your back-end ratio, which directly reduces what a lender will approve for housing.
Before you apply for a mortgage, paying down or paying off high-interest debt can increase your approval amount. Paying off a $400 car loan before you buy means that $400 stays in your pocket instead of going to the lender's calculation. The same logic applies to credit cards: if you can pay off the balance or significantly reduce it, your mortgage approval goes up.
Student loans are treated differently by different lenders. Some count only the actual monthly payment. Others count 0.5% to 1% of the total balance as a monthly payment, even if your actual payment is lower or in deferment. Ask your lender how they handle student debt before you apply.
Self-employed income and irregular paychecks
If you are self-employed or have commission-based income, lenders typically average your income over two years. They may also ask for tax returns, profit-and-loss statements, and bank statements to verify the income is real and stable.
If your income has grown significantly in the past two years, the lender may use a lower average than your current earnings. If it has dropped, they will use the lower figure. This can reduce your approval amount compared to someone with the same current income but a traditional W-2 job.
Seasonal work, contract work, and gig income all follow similar rules: lenders want to see a two-year history and proof that the income is likely to continue. If you have been self-employed for less than two years, some lenders will not approve you at all. Others will require a larger down payment or charge a higher interest rate.
How down payment size affects your monthly payment
A larger down payment lowers your monthly payment in two ways. First, you borrow less money, so the principal and interest are lower. Second, if you put down 20% or more, you avoid PMI entirely, which saves hundreds per month on larger loans.
A 10% down payment on a $300,000 home means you borrow $270,000. A 20% down payment means you borrow $240,000. The difference is $30,000 in borrowed money. At 7% interest over 30 years, that $30,000 difference costs about $200 per month in principal and interest alone. Add in the PMI you would pay on the 10% down loan—roughly $150 to $200 per month—and the total difference is $350 to $400 per month.
If you are close to your approval limit, increasing your down payment can make the difference between approval and denial, or between a payment you can afford and one that stretches you too thin.
Frequently Asked Questions
Can I use rental income to increase my mortgage approval?
Yes, if you own rental property or plan to rent out part of your home. Lenders typically count 75% of the rental income (accounting for vacancies and maintenance) toward your income. You will need to show a lease agreement and proof of income for at least one year. Some lenders require two years of history.
What if my spouse has income—do we combine it?
Yes. If you are married and applying together, lenders add both incomes and both debts. If one spouse has significantly lower income or higher debt, you may get a better rate by applying as an individual, but this depends on the lender and your situation. Ask the lender to run both scenarios.
Does a co-signer help me borrow more?
Yes. A co-signer's income and debt are added to the calculation, which can increase your approval. However, the co-signer is legally responsible for the loan if you do not pay. Lenders typically require a co-signer to be a family member and may charge a higher interest rate if the primary borrower has weak credit.
What if I get a raise or bonus after I am approved?
Your approval is based on income at the time you apply. A raise or bonus after approval does not change your loan amount or payment. However, extra income can help you pay down the loan faster or build savings for emergencies.
How much should I actually spend if I want financial security?
Financial advisors often recommend keeping housing costs to 25% to 30% of gross income, below the lender's 28% ceiling. This leaves room for emergencies, job changes, and unexpected expenses. If you are risk-averse or have irregular income, aim for the lower end. If you have stable income and a strong emergency fund, you can move closer to 30%.