Start with the 28/36 rule
Underwriters lean on a guideline called the 28/36 rule, and it's the fastest way to sanity-check any home price. It has two parts, both expressed against your gross (pre-tax) monthly income:
- 28% — the front-end ratio. Your total monthly housing payment should not exceed 28% of gross income.
- 36% — the back-end ratio. All your monthly debt payments combined — housing plus car loans, student loans, minimum credit-card payments, and the like — should not exceed 36%.
Both numbers are forms of your debt-to-income ratio (DTI): monthly debt payments divided by gross monthly income. Lenders care about DTI because it measures how much of your paycheck is already spoken for. Plenty of loan programs stretch beyond 36% — conventional and FHA loans often approve DTIs in the 43% to 50% range — but the further past 36% you go, the thinner your monthly cushion becomes.
"Housing cost" is more than principal and interest
The 28% test applies to your entire housing payment, not just the loan. Lenders bundle this into one figure called PITI:
- Principal — the part that pays down what you borrowed.
- Interest — the lender's charge on the balance.
- Taxes — property taxes, usually collected monthly into an escrow account.
- Insurance — homeowners insurance, also typically escrowed.
Two more line items get added when they apply: HOA dues if the property belongs to a homeowners association, and PMI (private mortgage insurance) if your down payment is under 20%. PMI commonly runs 0.3%–1.5% of the loan per year. The takeaway: principal and interest might be the headline number, but taxes, insurance, HOA, and PMI can easily add several hundred dollars a month — and all of it counts against your 28%.
A worked example
Say you earn $90,000 a year, which is $7,500 in gross monthly income. The 28% front-end limit gives you:
$7,500 × 0.28 = $2,100 per month for all housing costs (PITI)
Now reserve part of that $2,100 for the non-loan pieces. Suppose property taxes and homeowners insurance together run about $450/month and you have no HOA. That leaves roughly $1,650 for principal and interest. At a 6.5% rate over 30 years, $1,650/month supports a loan of about $261,000. Add a 20% down payment and you're looking at a home price near $326,000 — with no PMI, because you cleared the 20% threshold.
Change one input and the picture shifts. Drop the rate to 5.5% and the same $1,650 now supports about $291,000 of loan. Shrink the down payment to 10% and PMI eats into your $2,100 budget while you also borrow more — pushing the affordable price down even though the loan is larger. You can test any of these combinations with the free mortgage calculator and size your cash with the down payment calculator.
Income to home price, roughly
The table below applies the 28% rule and then backs out a rough home price. Assumptions: a 6.5% 30-year rate, a 20% down payment, and about $0.22 of every $1 of PITI absorbed by taxes and insurance (leaving ~78% for principal and interest). Your local property-tax rate will move these numbers, so treat them as a starting point, not a quote.
| Annual income | 28% of gross/mo | ~ Loan supported | ~ Home price (20% down) |
|---|---|---|---|
| $60,000 | $1,400 | $173,000 | $216,000 |
| $90,000 | $2,100 | $259,000 | $324,000 |
| $120,000 | $2,800 | $346,000 | $432,000 |
| $150,000 | $3,500 | $432,000 | $540,000 |
| $200,000 | $4,667 | $576,000 | $720,000 |
Notice these figures assume no other debt. The moment you add a $450 car payment or $300 in student loans, the 36% back-end limit — not the 28% front-end limit — becomes the binding constraint, and your affordable price falls.
The three levers that move your budget
Down payment. More cash up front means a smaller loan and a lower monthly payment, so the same budget buys more house. Crossing the 20% line also kills PMI, which is pure savings. The down payment calculator shows how different percentages change your loan size.
Credit score. Your score is the single biggest driver of the rate you're offered, and rate drives the payment. The gap between a top-tier score and a fair one can be more than a full percentage point — which, as the example above showed, can swing your affordable price by tens of thousands of dollars.
Existing debt. Every recurring payment you carry shrinks the room under your 36% back-end limit. Paying down a car loan or knocking out a credit-card balance before you apply can directly raise the mortgage you qualify for. A debt payoff calculator helps you sequence that, and it's worth checking your net worth so you know what's truly available for a down payment versus what should stay in reserves.
Pre-approval is a ceiling, not a target
A lender's pre-approval tells you the maximum loan they'll extend based largely on your income and debts. It deliberately ignores the rest of your life: retirement contributions, childcare, commuting costs, home maintenance (budget ~1% of the home's value per year), and the simple value of not feeling stretched. A house at the very top of your pre-approval is often the one that turns into the "house-poor" cliché.
A practical move is to pick a payment you're genuinely comfortable with — many buyers aim for the low-to-mid 20s as a percentage of gross income rather than the full 28% — and let that payment, not the lender's ceiling, set the price you shop for. Borrowing less than the max is the cheapest insurance you'll ever buy.
The takeaway
Run the 28/36 rule, build your estimate on full PITI rather than principal and interest alone, and remember that the down payment, your credit score, and your existing debts each move the number meaningfully. Then borrow comfortably below what you're approved for. Do that, and "how much house can I afford" stops being a guess and becomes a budget you control.
Frequently asked questions
- What is the 28/36 rule?
- It's a lending guideline that says your total housing payment should stay at or below 28% of your gross monthly income, and all of your monthly debt payments combined — housing plus car loans, student loans, credit cards, and so on — should stay at or below 36%. The first number is your front-end ratio and the second is your back-end ratio.
- What does PITI stand for?
- PITI is principal, interest, property taxes, and homeowners insurance — the four parts of a typical monthly housing payment. Lenders also count HOA dues and private mortgage insurance (PMI) when measuring affordability, so your true monthly cost can be meaningfully higher than principal and interest alone.
- How does my down payment affect how much house I can afford?
- A larger down payment lowers the amount you borrow, which lowers your monthly principal and interest. Putting down at least 20% also lets you avoid private mortgage insurance, freeing up room in your budget. Because your monthly payment drives affordability, more cash up front generally lets you buy a higher-priced home for the same monthly cost.
- Should I borrow the full amount a lender pre-approves me for?
- Usually not. A pre-approval is the maximum a lender is willing to risk, based mainly on your gross income and debts. It doesn't account for retirement saving, childcare, commuting, maintenance, or your own comfort. Most buyers are better off borrowing comfortably below the pre-approved ceiling so the payment leaves room for everything else.
This guide is general educational information, not financial advice. Always confirm figures with your lender and a qualified professional before making decisions.