How Much House Can I Afford? The 28/36 Rule Explained
Lenders look at your income, debts and credit to decide how much they will lend, but the amount a lender approves is not always the amount that is comfortable for you. A simple guideline can help you set your own limit before you shop.
The 28/36 rule
A common guideline says your housing costs should not exceed 28% of your gross monthly income, and your total monthly debt payments, including housing, should not exceed 36%. For example, with an income of $90,000 a year, gross monthly income is $7,500. The 28% limit is $2,100 for housing, and the 36% limit is $2,700 for all debts together. Lenders vary, and some loan programs allow higher ratios, so treat these as guidelines, not rules.
Count the full cost of owning
The mortgage payment is only part of the bill. Add property taxes, homeowners insurance, private mortgage insurance if your down payment is under 20%, and any HOA fees. Also plan for maintenance, which many owners budget at about 1% of the home value per year as a rough rule of thumb.
Interest rates matter a lot
On a $300,000 loan over 30 years, the principal and interest payment is about $1,896 a month at 6.5% and about $2,098 at 7.5%. That one-point difference adds roughly $200 a month, which can lower the price you can afford by tens of thousands of dollars.
Do not forget the down payment and cushion
Beyond the down payment, you need money for closing costs and an emergency fund after you buy. A payment that fits your budget on paper but leaves you with no savings can become stressful quickly.
Use the mortgage calculator to test different prices, down payments, rates and terms, and see the full monthly payment with taxes, insurance and PMI.