The short answer: the 28/36 guideline
A common starting point is the 28/36 guideline. Keep your total housing payment at or below 28% of your gross monthly income, and keep all monthly debt payments, housing included, at or below 36%. Gross income means your pay before taxes and other deductions.
The housing payment in the first number includes more than the loan. It covers principal, interest, property taxes and homeowners insurance, plus mortgage insurance or HOA dues if you have them. Lenders call the first number the front-end ratio and the second the back-end ratio.
The guideline is a rule of thumb. It gives you a budget that leaves room for savings, repairs and the rest of life. It is a planning tool, and it is more conservative than what many lenders will approve.
How lenders look at debt-to-income
Lenders care most about your debt-to-income ratio (DTI). The Consumer Financial Protection Bureau defines it as all of your monthly debt payments divided by your gross monthly income. A lender adds up the new mortgage payment, car loans, student loans, minimum credit card payments and similar obligations, then divides by what you earn.
Limits vary by loan program and lender. Fannie Mae's Selling Guide, for example, sets a maximum total DTI of 36% for manually underwritten loans, up to 45% when the borrower meets certain credit score and reserve requirements, and up to 50% for loans run through its automated Desktop Underwriter system. That means a lender may approve you for a payment well above what the 28/36 guideline suggests.
Approval and comfort are different questions. The lender checks whether you are likely to repay. You decide whether the payment still lets you save, handle a surprise bill and keep your other goals on track. Many buyers use the lender's figure as a ceiling and the 28/36 figure as a target.
What different incomes can afford
Here is what the 28% housing limit works out to at four household incomes. Every figure comes from the standard amortization formula, using these example assumptions:
- An example interest rate of 6.5% (not a current rate quote)
- A 30-year fixed-rate loan
- A 10% down payment
- Property taxes and homeowners insurance of 1.5% of the home price per year, combined
- No other monthly debt, no HOA dues, and mortgage insurance left out for simplicity
| Household income | Max housing payment (28%) | Approx. home price | Down payment (10%) | Loan amount | Principal and interest | Taxes and insurance |
|---|---|---|---|---|---|---|
| $50,000 | $1,166.67 | $168,141 | $16,814 | $151,327 | $956.49 | $210.18 |
| $75,000 | $1,750.00 | $252,212 | $25,221 | $226,991 | $1,434.74 | $315.26 |
| $100,000 | $2,333.33 | $336,282 | $33,628 | $302,654 | $1,912.98 | $420.35 |
| $150,000 | $3,500.00 | $504,424 | $50,442 | $453,981 | $2,869.47 | $630.53 |
Change any assumption and the numbers move. A lower rate, a larger down payment or a low-tax area raises the price you can afford. A higher rate, high property taxes, costly insurance or HOA dues lowers it. Because the down payment here is under 20%, a conventional loan would usually add private mortgage insurance, which would also trim the budget.
Worked example: the $100,000 row
Monthly gross income is $100,000 / 12 = $8,333.33. The 28% limit is $8,333.33 x 0.28 = $2,333.33. At 6.5% for 30 years, each $1,000 borrowed costs about $6.32 a month in principal and interest. Taxes and insurance at 1.5% a year add 0.125% of the price each month. Solving for the price that fits $2,333.33 gives about $336,282. With 10% down, you borrow $302,654, pay $1,912.98 a month in principal and interest, and budget $420.35 for taxes and insurance.
How other debts shrink your budget
Other debts matter because of the 36% back-end limit. Whatever you already owe each month comes out of that 36% first, and the house gets what is left, up to the 28% cap.
At a $100,000 income, 36% of monthly income is $3,000. The gap between 36% and 28% is about $666.67. If your car and student loan payments total $600 a month, you still have $2,400 for housing, which is more than the $2,333.33 front-end cap, so your budget does not change. If those payments total $1,000, you have only $2,000 left for housing. Under the same assumptions as the table, that cuts the affordable price from about $336,282 to about $288,242.
At a $50,000 income, the gap between 28% and 36% is only about $333.33 a month. A $500 car payment leaves $1,000 for housing, which drops the price from about $168,141 to about $144,121. Smaller incomes have less room to absorb existing debt.
This is why paying down a car loan or credit card before you apply can raise your buying power more than you might expect. Lenders typically use the required minimum payment on each debt, so a lower balance with the same minimum may not help, while a debt that is fully paid off drops out of the math.
Down payment and closing costs
Your cash needs go beyond the monthly payment. You also need money for the down payment and for closing costs, and ideally some savings left over afterward.
The down payment affects both the loan size and the type of loan. On a conventional loan, the CFPB notes that putting down less than 20% usually means paying private mortgage insurance, which protects the lender and adds to your monthly cost. In the table above, a 10% down payment ranges from $16,814 on the lowest price to $50,442 on the highest. A 20% down payment would double those amounts and remove the mortgage insurance on a conventional loan.
Closing costs cover items such as lender fees, appraisal, title services, prepaid interest and the first deposits into an escrow account for taxes and insurance. They vary widely by lender, loan size and location. You do not have to guess: a lender must give you a Loan Estimate within three business days of receiving your application, and it lists the estimated closing costs. Comparing Loan Estimates from a few lenders is one of the most direct ways to lower what you bring to closing.
Turning the numbers into a budget you can live with
Start with your gross income and apply the 28/36 guideline to get a target payment. Then subtract your existing monthly debts from the 36% figure and use the smaller of the two results.
Next, check the payment against your actual take-home pay. Gross-income rules ignore taxes, retirement contributions, childcare and other real costs, so a payment that passes 28/36 can still feel tight. Leave room for maintenance and repairs, which come with owning a home.
Finally, keep the cash side in view. Add the down payment, the closing costs from your Loan Estimate and a cushion of savings you plan to keep after closing. If the total is out of reach, a lower price, a larger down payment saved over time, or paying off a debt first are the main levers you control.