The price a lender will approve and the price you can comfortably afford are often two different numbers. This guide walks through the rules lenders use, the costs people forget, and a worked example, so you can set a budget before you start touring homes.
The 28/36 rule
Most conventional lenders start from two debt-to-income (DTI) ratios:
- Front-end ratio (28%): your total monthly housing cost, meaning principal, interest, property tax, homeowners insurance and any HOA or PMI, should stay at or below 28% of gross monthly income.
- Back-end ratio (36%): housing plus all other monthly debt payments (car loans, student loans, credit-card minimums) should stay at or below 36%.
Lenders can approve higher ratios. FHA loans and some conventional programs go to 43–50% back-end DTI. But 28/36 is a sensible ceiling for a budget that still leaves room to save.
A worked example
Suppose a household earns $100,000 a year ($8,333 a month) and pays $450 a month on a car loan.
- 28% front-end limit: $8,333 × 0.28 = $2,333 for total housing.
- 36% back-end limit: $8,333 × 0.36 = $3,000, minus the $450 car payment = $2,550.
The lower of the two, $2,333, is the monthly housing budget. If property tax, insurance and HOA come to about $600 a month, that leaves roughly $1,733 for principal and interest. At a 6.5% fixed rate over 30 years, $1,733 a month supports a loan of about $274,000. With a 10% down payment, that points to a home price of around $305,000. With 20% down (no PMI), it rises to about $342,000.
Rates move every day, so plug in a current quote. Each 1 percentage point change in the rate shifts the affordable loan amount by roughly 10–12%.
Costs people forget
- Closing costs: typically 2–5% of the loan amount, paid at closing.
- Private mortgage insurance (PMI): usually required on conventional loans with less than 20% down, often 0.3–1.5% of the loan a year.
- Maintenance: budget around 1–2% of the home's value each year for repairs.
- Higher utilities and insurance than you pay as a renter, especially in larger or older homes.
- An emergency fund: keep 3–6 months of expenses after your down payment and closing costs.
How to raise your budget safely
- Pay down other debt first. Every $100 of monthly debt you clear frees up $100 of back-end capacity.
- Improve your credit score. A higher score usually means a lower rate.
- Save a larger down payment to shrink the loan and avoid PMI.
- Shop several lenders on the same day and compare the APR, not just the rate.
Key takeaways
- Keep total housing costs at or below about 28% of gross income, and all debt at or below about 36%.
- Budget for taxes, insurance, PMI, closing costs and maintenance, not just the mortgage payment.
- Run your own numbers with a current rate quote before you start house-hunting.
This article is for general information and is not financial advice. Talk to a licensed lender about your situation.