How Much House Can You Afford? The 28/36 Rule Explained

"How much house can I afford?" sounds like a question about price, but lenders answer it with a question about your monthly budget. They look at how much of your income is already spoken for, work out the largest payment you can safely carry, and only then turn that payment into a price. Once you understand that process, you can do the same sums yourself before you start looking at homes.

The two ratios lenders use

Both ratios use your gross income, which is your pay before tax, and they are written as a debt-to-income ratio, or DTI.

• Front-end ratio: your monthly housing cost (loan payment, property tax and insurance, plus any HOA dues) divided by your gross monthly income. The usual limit is 28%.
• Back-end ratio: your housing cost plus every other monthly debt payment, such as car loans, student loans and credit card minimums, divided by gross monthly income. The usual limit is 36%.

These are guidelines. Government-backed loans are more flexible: an FHA loan may allow about 31% and 43%, and VA loans use a single ratio of around 41%. A strong credit score and a large down payment can also persuade a lender to go higher, but that does not mean the payment will feel comfortable.

A worked example

Suppose you earn $90,000 a year, which is $7,500 a month before tax, and you pay $500 a month toward a car loan and a student loan.

1. Front-end limit: $7,500 × 28% = $2,100 for housing.
2. Back-end limit: $7,500 × 36% = $2,700 for all debts. Subtract your $500 of other debts and $2,200 is left for housing.
3. Take the lower figure: $2,100 a month is the most you can put toward housing.

Now turn the payment into a price. Assume a 30-year loan at 6.5%, a 20% down payment, property tax of 1.1% of the price a year and $1,500 a year for insurance. The housing payment is the loan payment plus about $428 of tax and insurance, so working backwards from $2,100 gives a home price of about $331,000, a loan of about $265,000 and a down payment of about $66,000.

How the interest rate changes the answer

The same budget buys a very different home when rates move. Because most of a payment on a long loan is interest, a one-point change in the rate shifts the price by roughly eight to nine percent.

View the numbers behind the interest-rate chart

Interest rate	Housing budget	Home price you can afford	Loan amount (20% down)
5.5%	$2,100	$362,000	$289,000
6.5%	$2,100	$331,000	$265,000
7.5%	$2,100	$303,000	$243,000

Why other debts matter so much

Every dollar you owe each month on other debts comes out of the back-end budget. At first the front-end limit protects you, because it is the smaller number. But once other debts pass about $600 a month in this example, the back-end rule takes over and each extra dollar of debt takes a dollar from your housing budget.

The lender's limit is not your budget

The ratios only look at what a lender counts. They leave out costs that are real for you: maintenance, utilities, furniture, commuting, savings and the occasional emergency repair. A common rule of thumb is to set aside about 1% to 2% of the home's value every year for upkeep.

If that total feels tight, aim lower than the lender's ceiling. Many buyers choose a price that keeps the housing cost at 25% of gross income or less, or at about a third of take-home pay.

Ways to raise what you can afford

• Pay down other debts before applying, starting with those that have the highest monthly payment relative to the balance.
• Save a larger down payment. It reduces the loan, and at 20% it avoids private mortgage insurance on a conventional loan.
• Improve your credit score, which can lower your interest rate and widen your options.
• Add income that lenders can count, such as a co-borrower with steady pay.
• Compare loan types, since FHA and VA loans have different limits and costs.

Common mistakes

• Using take-home pay where the lender uses gross pay, or the other way round, and then comparing the results.
• Leaving out property tax, insurance and HOA dues, which can be several hundred dollars a month.
• Treating the pre-approval amount as a target. It is the most a lender will lend, not what you should spend.
• Forgetting closing costs, moving costs and the cash needed to furnish the home.
• Basing the plan on today's rate and not checking what happens if it is a point higher.

Common questions

Sources and further reading

• Consumer Financial Protection Bureau: Buying a house
• CFPB: What is private mortgage insurance?
• CFPB: What is an escrow account?

This guide is for general education and is not financial advice. The ratios, rates and costs in the examples are illustrations. Lenders set their own limits, so talk to a licensed lender about your own situation.