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

The most common way lenders decide how much you can borrow 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. Your total debt payments—housing plus car loans, credit cards, student loans, everything—should not exceed 36% of gross income.

If you earn $5,000 gross per month, 28% is $1,400. That is the maximum your lender will typically allow for housing costs. If you already carry $400 in other debt payments, your housing budget drops to $1,400 because your total debt cannot exceed $1,800 (36% of $5,000).

This rule is a floor, not a ceiling. Just because a lender will approve you for $1,400 does not mean you should spend it. Your actual comfort zone depends on your down payment, your emergency fund, your job stability, and how much house costs in your area.

Key Takeaways

  • Lenders use the 28/36 rule: housing costs should be no more than 28% of gross income, and all debt payments should not exceed 36%.
  • Your down payment size directly affects your monthly payment—a larger down payment means a smaller loan and lower monthly costs.
  • Property taxes, homeowners insurance, and HOA fees are part of your housing payment, not separate from it.
  • A mortgage calculator can show you the monthly payment for different loan amounts, but your actual affordability depends on your savings, job security, and local housing costs.

How down payment size changes what you can afford

The amount you put down at closing directly shrinks or grows your monthly payment. A 20% down payment on a $300,000 house means you borrow $240,000. A 5% down payment means you borrow $285,000. The difference in monthly principal and interest alone is roughly $270 per month, before taxes and insurance.

Putting down less than 20% triggers private mortgage insurance (PMI), an extra monthly charge that protects the lender if you stop paying. PMI typically costs 0.5% to 1% of your loan amount per year, added to your monthly bill. On a $285,000 loan, that is $120 to $240 per month. PMI drops off once you reach 20% equity, but that takes years.

If you have $60,000 saved and are looking at a $300,000 house, you have two paths: put down 20% ($60,000) and borrow $240,000, or put down less and keep cash in reserve. The second option costs more per month but leaves you with a safety net if your roof leaks or you lose hours at work.

Add property tax, insurance, and HOA fees to find your real housing cost

Your lender quotes you a monthly payment for principal and interest only. That is not your actual housing cost. You must also pay property tax (varies by county and state), homeowners insurance (required by lenders), and possibly HOA fees if the property is in a planned community.

Property tax ranges from under 0.3% of home value per year in some states to over 2% in others. A $300,000 house in a high-tax county might cost $500 per month in property tax alone. Insurance for the same house might run $100 to $200 per month depending on your location and the home's condition. An HOA fee, if present, could be $200 to $500 per month.

Add these together: a $240,000 mortgage at 7% interest is roughly $1,600 per month in principal and interest. Add $500 in property tax, $150 in insurance, and $300 in HOA fees, and your actual housing payment is $2,550 per month. That is the number you use against the 28% rule, not the $1,600.

Account for your existing debt when calculating your limit

If you carry car payments, student loans, credit card balances, or other monthly debt, those reduce your housing budget under the 36% rule. A lender looks at your total debt-to-income ratio, not just housing.

Suppose you earn $6,000 gross per month. The 36% limit is $2,160 in total debt payments. If you have a $400 car payment and $200 in student loan payments, you have $1,560 left for housing. That is your ceiling, even if the 28% rule would allow $1,680.

Before you start house hunting, add up every monthly debt payment: auto loans, personal loans, credit cards (use the minimum payment, not the balance), student loans, alimony, child support, anything that shows up on your credit report. Subtract that total from 36% of your gross income. What remains is your maximum housing budget.

Understand how interest rates affect your monthly payment

A 1% difference in interest rate changes your monthly payment significantly. On a $240,000 loan over 30 years, the difference between 6% and 7% is roughly $160 per month. Between 6% and 8% it is roughly $320 per month. That same $240,000 at 5% costs about $1,290 per month; at 8% it costs about $1,760.

Your interest rate depends on your credit score, the size of your down payment, the loan type (conventional, FHA, VA), and current market rates. You cannot control market rates, but you can improve your credit score before applying and save for a larger down payment. Both lower your rate and shrink your monthly payment.

When you get a mortgage quote, ask for the rate lock period—usually 30 to 60 days. Rates move daily. If you are not ready to close within that window, your rate may change. If rates drop, you can often refinance later, though refinancing has its own costs.

Use a mortgage calculator to test different scenarios

A mortgage calculator shows you the monthly principal and interest payment for a given loan amount, interest rate, and loan term. Enter your numbers and adjust them to see how changes affect your payment. Most calculators let you add property tax, insurance, and HOA fees to see your full housing cost.

Start by calculating what payment you can afford based on your income and existing debt. Then work backward: if your maximum housing payment is $1,800 per month and you know property tax and insurance will be $600, you have $1,200 left for principal and interest. A calculator will tell you what loan amount that supports at your expected interest rate.

Run the numbers at different interest rates too. If rates are currently 7% but you are worried they might rise, see what your payment would be at 7.5% or 8%. That tells you whether your budget has room to absorb a rate increase, or whether you need to lower your target home price.

Consider your emergency fund and job stability before committing

The 28/36 rule is what lenders will approve. What you can actually afford depends on your situation. If you have six months of expenses in savings and a stable job, you can probably stretch closer to the 28% limit. If you have three months of savings and your industry is volatile, you should aim lower—perhaps 20% to 24% of gross income.

A mortgage payment is fixed, but homeownership costs are not. Repairs, maintenance, property tax increases, and insurance rate hikes all happen. If your payment consumes 28% of your income and an unexpected $5,000 repair drains your savings, you are one job loss away from trouble.

Be honest about your job security and your comfort with risk. A teacher with a pension and a 30-year career ahead can afford more house than a freelancer with irregular income, even if their gross income is the same. Your actual affordability is personal.

Frequently Asked Questions

What if I have bad credit or a low credit score?

Lenders will still work with you, but your interest rate will be higher, which increases your monthly payment. A score below 620 may limit you to FHA loans or require a larger down payment. Before applying, check your credit report for errors and dispute any you find. Even a small score improvement can lower your rate by 0.25% to 0.5%, saving you $50 to $100 per month.

Can I afford a house if I am self-employed?

Yes, but lenders require more documentation. You will typically need two years of tax returns and possibly profit-and-loss statements. Lenders average your income over two years, so a strong recent year does not help if the year before was weak. Plan ahead and keep detailed records.

Does the 28/36 rule apply to every lender?

Most conventional lenders use it, but some allow up to 43% debt-to-income ratio if you have strong credit and savings. FHA loans sometimes allow higher ratios too. Shop with multiple lenders to see what they will approve, but remember that approval is not the same as affordability.

What happens if my property taxes or insurance go up after I buy?

Your monthly payment will increase. Property taxes rise when your county reassesses your home's value or raises the tax rate. Insurance increases when claims rise in your area or your home ages. Budget for these increases—typically 3% to 5% per year—so a payment that fits today does not squeeze you in five years.

Should I use a co-signer to may have access to for a larger mortgage?

A co-signer's income and debt count toward your application, which can raise your approval amount. But the co-signer is legally responsible for the loan if you do not pay. Only use a co-signer if you genuinely cannot afford the house on your own income, and understand that you are putting their credit and finances at risk.