Start with your gross monthly income and the 28/36 rule

The most common benchmark is the 28/36 rule: your housing payment should not exceed 28% of your gross monthly income, and your total debt payments should not exceed 36%. This is what most lenders use to decide whether to approve you for a mortgage.

To find your number: take your gross monthly income (before taxes), multiply by 0.28. That is your target maximum for housing. If you earn $5,000 gross per month, 28% is $1,400. That $1,400 covers your mortgage principal, interest, property taxes, homeowners insurance, and mortgage insurance if you put down less than 20%.

The 36% rule is stricter. Add up all your monthly debt: car loans, student loans, credit cards, personal loans, and the housing payment you are considering. That total should not exceed 36% of gross income. If your gross is $5,000, your total debt ceiling is $1,800 per month. If you already owe $400 on a car and $200 on student loans, you have $1,200 left for housing.

Key Takeaways

  • The 28/36 rule limits your housing payment to 28% of gross income and total debt to 36%, which is what most lenders enforce.
  • Your housing payment includes mortgage principal and interest, property taxes, homeowners insurance, and mortgage insurance — not just the loan itself.
  • Down payment size affects your monthly payment: a smaller down payment means a larger loan and higher mortgage insurance costs.
  • Debt you already carry reduces the amount you can borrow, because lenders look at your total monthly obligations, not just housing.
  • Your actual comfort level may be lower than what a lender will approve, especially if you have irregular income or want to save money each month.

What counts as your housing payment

The housing payment that lenders count is not just your mortgage. It includes four things: the loan payment itself (principal and interest), property taxes, homeowners insurance, and mortgage insurance if applicable. Some lenders also include homeowners association fees.

Property taxes vary widely by location — from under 0.5% of home value per year in Hawaii to over 2% in New Jersey. A $300,000 home in New Jersey costs roughly $6,000 per year in property tax alone, or $500 per month. The same home in Hawaii might be $1,500 per year. You need to know your local rate before you calculate what you can afford.

Homeowners insurance typically runs $800 to $1,500 per year depending on the home's age, location, and whether it is in a flood or hurricane zone. Mortgage insurance (PMI) applies if you put down less than 20%. On a $300,000 loan with 10% down, PMI might add $150 to $300 per month. All of these stack on top of your loan payment.

How down payment size changes what you can afford

A larger down payment lowers your monthly payment in two ways: the loan itself is smaller, and you avoid mortgage insurance. If you can put 20% down, you skip PMI entirely. Below 20%, the lender adds PMI to your payment until you reach 20% equity.

Example: a $300,000 home with a 30-year loan at 7% interest. With 20% down ($60,000), your loan is $240,000. The principal and interest payment is roughly $1,596 per month. With 10% down ($30,000), your loan is $270,000, the payment is $1,797, and PMI adds another $200, bringing the total to $1,997 — about $400 more per month. That difference matters when you are calculating your 28% ceiling.

If you have limited savings, a smaller down payment lets you buy sooner, but it raises your monthly cost and the total interest you pay over the life of the loan. Some first-time buyer programs allow 3% down; others go as low as 0% for certain borrowers. The trade-off is always higher monthly payments.

Subtract existing debt from your borrowing power

Lenders look at your debt-to-income ratio, which means every loan you already have reduces the housing payment they will approve. If you have a car loan, student loans, or credit card balances, those payments come out of your 36% ceiling first.

Suppose your gross income is $6,000 per month. Your 36% debt ceiling is $2,160. You already pay $300 on a car loan and $250 on student loans. That leaves $1,610 for housing. But your 28% housing ceiling is $1,680, so the debt rule is the limiting factor here — you can afford $1,610, not $1,680.

This is why paying down debt before buying a house matters. Every $100 you eliminate from existing payments frees up $100 for a housing payment. If you can pay off the car loan before applying for a mortgage, you move that $300 into your housing budget.

Account for property taxes and insurance in your area

The 28% rule works only if you know your local costs. Two homes with identical loan payments can have very different total housing costs depending on where they are.

Research your county's property tax rate — your county assessor's office publishes this, and it is usually listed as a percentage of home value or a rate per $1,000 of assessed value. Then estimate homeowners insurance by calling three insurers with the address and home details. Do not guess; get actual quotes.

If you are buying in a flood zone, earthquake zone, or hurricane-prone area, insurance costs spike. Some areas require separate flood insurance through the National Flood Insurance Program, which adds another $500 to $2,000 per year depending on risk. Factor this in before you decide what price range to shop in.

Decide whether the lender's number matches your comfort level

Just because a lender approves you for a certain amount does not mean you should borrow it. Lenders use the 28/36 rule to manage their risk, not to ensure you have money left for groceries, car repairs, medical bills, or saving.

If the 28% rule puts your housing payment at $1,600 but you have an irregular income, a young family, or aging parents you help support, a safer target might be 20% to 25% of gross income. That gives you breathing room when unexpected costs hit.

Also consider your local job market. If you live in an area where layoffs are common or your industry is cyclical, a lower housing payment means you can weather a few months without income. If your job is stable and your income is rising, you can afford closer to the lender's ceiling.

Use a mortgage calculator to see the full picture

Online mortgage calculators let you plug in a loan amount, interest rate, and loan term to see the principal and interest payment. Then add your estimated property taxes and insurance to get the true monthly cost. Many calculators include these fields.

Start by calculating backwards: enter the housing payment you think you can afford (28% of your gross income), and the calculator will show you the loan amount that produces that payment. Then subtract your down payment savings to find the home price you can target.

Run the numbers at a few different interest rates, because rates change. If you are shopping now but will not close for six months, rates could be higher or lower. Seeing the payment at 6%, 7%, and 8% helps you understand the range.

Frequently Asked Questions

What if I have no debt besides the mortgage I am trying to get?

Then the 28% rule is your limiting factor, not the 36% rule. Your housing payment can be up to 28% of gross income. This is the simplest scenario — you have the most borrowing power because no other debt is competing for it.

Does the 28/36 rule apply to all types of mortgages?

Most conventional lenders use it, but some government-backed loans (FHA, VA, USDA) allow higher ratios — sometimes 40% to 50% for housing. However, higher approval does not mean higher affordability. Stick to 28/36 unless you have a specific reason to stretch further.

Should I include my spouse's income if we are buying together?

Yes. Lenders add both incomes together to calculate your debt-to-income ratio. If you earn $4,000 and your spouse earns $3,000, your combined gross is $7,000, and your 28% housing ceiling is $1,960. Both of your debts count against the 36% limit.

What happens if I get approved for more than I think I can afford?

Lenders approve based on risk to them, not on your actual ability to live comfortably. If the math says you can afford $1,800 per month but you feel stretched, use a lower number. Your comfort matters more than the lender's approval.

Do I need to include property taxes and insurance when I calculate my 28% number?

Yes. The 28% rule includes everything: loan payment, property taxes, insurance, and mortgage insurance. If you calculate only the loan payment and ignore taxes and insurance, your actual housing cost will be higher than you planned.