How Much House Can I Afford? The 28/36 Rule, Done

The 28/36 rule in plain numbers

The classic affordability guideline has two tests. Your housing payment, including principal, interest, property tax, insurance, mortgage insurance and HOA dues, should stay under 28% of gross monthly income. Your housing payment plus every other monthly debt should stay under 36%. Whichever limit is lower wins.

• Gross monthly income: $100,000 divided by 12 is about $8,333
• Front-end limit: 28% of $8,333 is $2,333 for housing
• Back-end limit: 36% of $8,333 is $3,000 for all debts
• Existing debts: a $400 car loan plus $200 of student loans is $600
• Room left under the back-end test: $3,000 minus $600 is $2,400, so the $2,333 front-end cap is the binding one

Many lenders will approve a back-end ratio of 43% or even close to 50% with strong credit and savings. That is a qualification ceiling. The 28/36 pair is a comfort target, and the gap between the two is where house-poor budgets are born.

Turn a monthly budget into a home price

Once you know the payment you can carry, you need the price that produces it. Using a 30-year loan at 6.5%, a 1.1% property tax rate, $1,500 a year of homeowners insurance and 0.5% PMI, a $2,333 monthly budget supports these prices:

• 10% down: about $316,000, with roughly $1,799 principal and interest, $290 tax, $125 insurance and $119 PMI
• 20% down: about $370,000, because PMI disappears and a larger share of the payment goes to the loan
• 5% down: about $302,000, since a bigger loan and PMI eat into the same budget
• At 5.5% instead of 6.5%, the 10%-down price rises to about $345,000; at 7.5% it falls to about $291,000

Rate moves matter more than most buyers expect. A one-point change in the rate shifts affordable price by roughly $25,000 to $30,000 on this income, which is why locking a rate at the right time can matter as much as negotiating the price.

Debts count toward the 36 side, and the Auto Loan Calculator shows a car payment. For take-home pay, the Paycheck & Salary Calculator helps.

Hidden costs that shrink what you can afford

The payment is not only principal and interest. The escrow items and fees attached to a specific property can move your affordable price more than the house itself.

• Property tax: a home in a county charging 2.2% instead of 1.1% drops the same budget from about $316,000 to about $280,000
• HOA dues: a $250 monthly association fee lowers the price to roughly $281,000, because every dollar of dues is a dollar not available for the loan
• Insurance: coastal, wildfire and hail regions can double premiums, so get a real quote before you offer
• PMI: usually 0.3% to 1.5% of the loan per year on conventional loans with less than 20% down; FHA loans charge their own mortgage insurance premium instead
• Maintenance: budget about 1% to 2% of the home value per year for repairs, which does not show up in any lender ratio

Cash to close and the cushion you keep

Affordability is also a cash question. Beyond the down payment, closing costs typically run 2% to 5% of the loan amount for lender fees, title insurance, appraisal, prepaid taxes and insurance. On a $284,000 loan that is roughly $5,700 to $14,200 on top of the down payment.

• Down payment options: conventional loans can start at 3%, FHA at 3.5%, and VA and USDA loans can require nothing down for eligible buyers
• Keep reserves: lenders like two to six months of payments in the bank after closing, and so should you
• Moving and furnishing: a few thousand dollars disappears in the first month for movers, window coverings and appliances
• Do not drain retirement accounts to hit 20% down if it leaves you with no emergency fund

A slightly cheaper home with a healthy cash cushion is almost always safer than stretching to the maximum and closing with an empty savings account.

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