How Much House Can You Afford? The 28/36 Rule Explained
Before looking at homes, it helps to know what monthly payment you can carry and what loan that payment supports. Lenders in the United States have long used a simple guideline called the 28/36 rule. Other countries use different tests, but the logic is useful anywhere: housing costs and total debt should stay below a sensible share of income. This guide walks through the calculation with real numbers.
The 28/36 rule
- 28%: total monthly housing costs (mortgage principal and interest, property tax, home insurance and similar) should not exceed about 28% of gross monthly income.
- 36%: all monthly debt payments together, including housing, car loans, student loans and credit cards, should not exceed about 36% of gross income.
Gross income means income before tax. Many lenders allow higher ratios for strong applicants, but staying near these limits leaves room for savings and surprises.
Step 1: Find your maximum housing cost
With a gross income of 6,000 a month:
- 28% for housing: 6,000 × 0.28 = 1,680
- 36% for all debts: 6,000 × 0.36 = 2,160, which leaves 480 for other debt payments if housing uses the full 1,680.
If you already pay 600 a month on a car and other loans, the 36% limit lowers the housing budget to 2,160 − 600 = 1,560.
Step 2: Subtract tax and insurance
Property tax and insurance vary hugely by location. If they total 425 a month (5,100 a year), the amount left for principal and interest is 1,680 − 425 = 1,255.
Step 3: Turn the payment into a loan amount
Reverse the mortgage formula: loan = payment × (1 − (1 + r)−n) ÷ r, with r the monthly rate and n the number of payments. At 6.5% over 30 years, a payment of 1,255 supports a loan of about 198,555. At 5.5%, the same payment supports about 221,033. You can check any combination in the mortgage calculator by adjusting the price until the monthly payment matches your budget.
Step 4: Add the down payment
The price you can afford is the loan plus your down payment. With 50,000 saved for the down payment (after keeping money aside for closing costs and moving), the example points to homes around 250,000 at 6.5%. A larger down payment also lowers the loan, the payment and, in many markets, the interest rate or mortgage insurance.
What changes the answer most
- Interest rate: one percentage point changes the affordable loan by roughly 10%.
- Other debts: paying off a car loan before applying can raise the housing budget directly.
- Location costs: property tax, insurance and service charges can add hundreds per month.
- Term: a 15-year loan saves a lot of interest but supports a much smaller loan for the same payment.
Beyond the rule: is it comfortable?
The 28/36 rule says what lenders may accept, not what feels comfortable. Before committing, check that you can still save each month, keep an emergency fund of several months' expenses, and cope if the rate rises at the end of a fixed period. Running the numbers at a rate one or two points higher is a sensible stress test.
Costs people forget
- Closing costs and taxes on purchase, often several percent of the price.
- Maintenance and repairs: a common rule of thumb is to budget around 1% of the home's value per year.
- Utilities, service charges or homeowners' association fees.
- Furniture and moving costs.
This guide is general information, not financial advice. Lenders' rules and local costs differ; speak to a qualified adviser before buying.