The 28/36 Rule Explained
The most widely used guideline for home affordability is the 28/36 rule:
- 28% Rule: Your monthly mortgage payment (including taxes and insurance) should not exceed 28% of your gross monthly income.
- 36% Rule: Your total monthly debt payments (mortgage + car loans + student loans + credit cards) should not exceed 36% of your gross monthly income.
Quick Example
If you earn $80,000/year ($6,667/month):
- Max mortgage payment: $6,667 × 0.28 = $1,867/month
- Max total debt: $6,667 × 0.36 = $2,400/month
How to Calculate Your Home Budget
Step 1: Know Your Gross Monthly Income
This is your pre-tax income. If you earn $80,000/year, your gross monthly income is $6,667.
Step 2: Calculate Your Maximum Monthly Payment
Multiply your gross monthly income by 0.28. This is the maximum you should spend on housing costs including principal, interest, taxes, and insurance (PITI).
Step 3: Factor in Your Down Payment
A larger down payment means you can afford a more expensive home with the same monthly payment. With 20% down, you also avoid PMI (Private Mortgage Insurance), saving $100-300/month.
Step 4: Consider Current Interest Rates
At 6.5% interest, a $300,000 loan costs about $1,896/month. At 7%, the same loan costs $1,996/month. That 0.5% difference adds up to $36,000 over 30 years.
Income-Based Affordability Table
| Annual Income | Max Monthly Payment (28%) | Estimated Home Price* |
|---|---|---|
| $50,000 | $1,167 | $185,000 |
| $60,000 | $1,400 | $220,000 |
| $70,000 | $1,633 | $260,000 |
| $80,000 | $1,867 | $295,000 |
| $90,000 | $2,100 | $335,000 |
| $100,000 | $2,333 | $370,000 |
| $120,000 | $2,800 | $445,000 |
| $150,000 | $3,500 | $555,000 |
*Assumes 20% down, 6.5% rate, 30-year fixed, includes estimated taxes/insurance.
Factors That Affect How Much Home You Can Afford
1. Credit Score
Your credit score directly impacts your interest rate. A score of 760+ gets the best rates, while below 680 can add 0.5-1.5% to your rate — costing tens of thousands over the loan's life.
2. Debt-to-Income Ratio (DTI)
Lenders look at two DTI ratios:
- Front-end DTI: Housing costs ÷ gross income (aim for under 28%)
- Back-end DTI: All debts ÷ gross income (aim for under 36%)
3. Down Payment Size
- 3-5% down: FHA/conventional minimums. Higher monthly payments + PMI.
- 10% down: Good middle ground. Lower PMI.
- 20% down: No PMI required. Best monthly payment.
4. Property Taxes & Insurance
These vary dramatically by location. Property taxes can range from 0.3% (Hawaii) to 2.5% (New Jersey) of home value annually.
Common Mistakes to Avoid
- Maxing out your budget — Just because you qualify for $400K doesn't mean you should spend $400K. Leave room for maintenance, emergencies, and lifestyle.
- Forgetting closing costs — Budget 2-5% of the home price for closing costs.
- Ignoring maintenance — Plan for 1-2% of home value annually in maintenance costs.
- Not getting pre-approved — Pre-approval gives you a concrete budget and makes your offer stronger.
Use Our Mortgage Calculator
Ready to see exact numbers? Use our [free mortgage calculator](/mortgage-calculator) to calculate your monthly payment based on your specific home price, down payment, and interest rate.