How Much House Can I Afford? The 28/36 Rule With a Worked Example

Step 1: the 28/36 rule

Conventional lenders often use two debt-to-income (DTI) limits based on gross monthly income:

• Front-end ratio: housing costs (principal, interest, tax, insurance, HOA) up to 28% of gross income. For $8,000 a month, that is $2,240.
• Back-end ratio: all monthly debt payments including housing up to 36%, or $2,880. With $500 a month of existing car and student-loan payments, the most left for housing is $2,380.

The lower of the two limits applies — here $2,240. FHA and some other programmes allow higher ratios, but higher limits are not a reason to borrow more.

Step 2: subtract tax, insurance and HOA

The $2,240 has to cover more than the loan. Suppose property tax, insurance and HOA dues come to about $520 a month in the area you are looking at. That leaves $1,720 for principal and interest.

Step 3: turn a payment into a loan amount

Running the payment formula backwards gives the largest loan $1,720 a month can repay. On a 30-year fixed loan:

Rate    Maximum loan
5.5%    $302,929
6.5%    $272,123
7.5%    $245,990

At 6.5%, a $272,123 loan with 20% down supports a price of about $340,000, which needs a $68,000 down payment. Every percentage point of interest moves the budget by roughly $26,000–31,000 of borrowing, which is why rate quotes matter so much. The loan affordability calculator does this step for any payment, rate and term.

Step 4: check the cash you need to close

• Down payment: $68,000 for 20% on $340,000. Less down means PMI and a bigger loan.
• Closing costs: typically 2–5% of the price — about $6,800 to $17,000 here.
• Moving, furniture and immediate repairs: easy to forget and rarely small.
• An emergency fund after closing: many planners suggest three to six months of expenses. Spending every dollar on the down payment leaves you exposed to the first broken water heater.

Step 5: stress-test the budget

• Use take-home pay, not gross: $2,240 is 28% of gross income but a much larger share of what reaches your account after tax and retirement contributions.
• Add maintenance: budgeting 1–2% of the price a year ($3,400–6,800 here) avoids being surprised by roofs and appliances.
• Plan for change: one income dropping, a new child, or a job move. If the payment only works when everything goes right, aim lower.
• Commuting and utilities differ by neighbourhood and house size; a cheaper house further out can cost more overall.

Putting it together

For this household the numbers point to a price around $340,000 at today’s rate, with roughly $75,000–85,000 of cash needed for the down payment and closing costs, before moving costs. Treat that as a ceiling rather than a target: buying below it leaves room for savings, retirement contributions and the unexpected. Rules of thumb such as 28/36 are screening tools — your lender’s official Loan Estimate and your own budget decide the final answer. This guide is educational and not financial advice.

Down payment options

• Conventional loans: as little as 3% down for some first-time buyer programmes, with PMI until you reach 20% equity.
• FHA loans: 3.5% down with a credit score of 580 or higher, with mortgage insurance that often lasts for the life of the loan.
• VA loans for eligible service members and veterans, and USDA loans in eligible rural areas: possibly no down payment.
• 20% down avoids PMI on conventional loans and lowers the monthly payment, but draining all savings to reach 20% can be riskier than paying PMI for a few years.

What lenders check besides income

• Credit score: the best pricing usually starts around 740 or higher. A lower score can mean a higher rate or more expensive mortgage insurance — on a $272,000 loan, half a percentage point costs about $90 a month.
• Employment history: typically two years of steady income, with extra documentation for self-employed borrowers.
• Reserves: some loans require savings equal to a few months of payments left over after closing.
• The property itself: the appraisal must support the price, and condo loans also depend on the building’s finances.

Getting pre-approved before house-hunting turns these checks into a concrete number and shows sellers you can close.

Renting versus buying

Comparing a mortgage payment with rent is misleading on its own. Part of each mortgage payment builds equity, but owners also pay costs renters do not: property tax, insurance, maintenance, and the transaction costs of buying and later selling, which together can approach 8–10% of the price. Renters, meanwhile, can invest the down payment elsewhere.

As a rule of thumb, buying tends to make financial sense when you expect to stay at least five years, so that price appreciation and principal repayment can outweigh the costs of the purchase and sale. Moving sooner usually favours renting. Personal factors — stability, school catchment, the freedom to renovate — matter as much as the arithmetic.

Help for first-time buyers

Every US state has a housing finance agency, and many cities and counties run their own programmes. Depending on income and location, they can offer down-payment assistance, closing-cost grants, forgivable second loans or below-market rates. Eligibility rules and repayment conditions vary — some assistance must be repaid if you sell within a set number of years — so read the terms and ask a HUD-approved housing counsellor if anything is unclear.