The basic rule: your housing payment should not exceed 28% of your gross monthly income

Lenders use a debt-to-income ratio to decide how much they will lend you. The most common threshold is 28%: if you earn $5,000 per month before taxes, lenders typically want your housing payment (mortgage, property tax, insurance, and homeowners association fees combined) to stay under $1,400.

This is not a law. It is a lending standard that most banks and mortgage companies follow. Some lenders will go higher—up to 31% or even 43%—if you have strong credit, a large down payment, or low existing debt. Others will stay stricter. The 28% figure is the baseline you should know before you start house hunting.

Your actual affordability depends on three things: your gross income, your existing debt payments, and how much you have saved for a down payment. A mortgage calculator can show you the monthly payment for a given loan amount, but it cannot tell you whether that payment will strain your budget or leave you vulnerable if your income drops.

Key Takeaways

  • Lenders typically cap your housing payment at 28% of your gross monthly income, though some will go higher depending on credit and down payment size.
  • Your housing payment includes the mortgage principal and interest, property taxes, homeowners insurance, and HOA fees—not just the loan payment alone.
  • If you carry car loans, credit card debt, or student loans, lenders will also check that your total debt payments do not exceed 36% to 43% of gross income.
  • A down payment of 20% or more typically gets you better interest rates and removes the requirement to pay mortgage insurance, which can add hundreds to your monthly payment.
  • Your personal comfort level may be lower than what a lender will approve—many financial advisors suggest keeping housing costs at 25% or less of gross income.

How lenders calculate what you can borrow

When you apply for a mortgage, the lender runs two debt-to-income calculations. The first is the front-end ratio: your housing payment divided by gross income. The second is the back-end ratio: all your monthly debt payments (housing, car loans, credit cards, student loans, child support) divided by gross income.

Most conventional lenders require a front-end ratio of 28% and a back-end ratio of 36%. If you earn $6,000 per month, you can have a housing payment of up to $1,680, but your total debt payments cannot exceed $2,160. If you already owe $400 per month on a car and $200 on student loans, your housing payment can only be $1,560 ($2,160 minus $600).

FHA loans (backed by the Federal Housing Administration) often allow a back-end ratio of 43%, which gives borrowers more room. VA loans (for military members and veterans) and USDA loans (for rural properties) have their own rules. If you carry significant existing debt, these programs may let you borrow more than a conventional lender would.

What counts as your housing payment

The lender's calculation includes four components: principal and interest on the mortgage, property taxes, homeowners insurance, and homeowners association (HOA) fees if they apply. This total is often called PITI (Principal, Interest, Taxes, Insurance).

Property taxes vary widely by location—from less than 0.5% of home value per year in some states to over 2% in others. Insurance premiums depend on the home's age, location, and your credit score. If you put down less than 20%, you will also pay private mortgage insurance (PMI), which protects the lender if you default. PMI typically runs 0.5% to 1% of the loan amount per year, added to your monthly payment.

A $300,000 home with a $60,000 down payment (20%) in a moderate-tax state might have a monthly PITI of $1,800 to $2,000. The same home with a $30,000 down payment (10%) could run $2,100 to $2,400 because of PMI. Always ask the lender for a full Loan Estimate before you commit—it breaks down every cost and shows the true monthly payment.

How down payment size affects what you can afford

A larger down payment lowers your monthly payment in two ways: it reduces the loan amount, and it eliminates PMI. Putting down 20% is the traditional threshold where PMI disappears. Putting down 10% instead of 20% on a $300,000 home adds roughly $200 to $300 per month.

Down payment size also affects the interest rate the lender offers. Borrowers with 20% down typically get better rates than those with 5% or 10% down. A difference of 0.5% in interest rate on a $240,000 loan adds about $120 per month to your payment.

If you have saved $40,000 and are deciding between a $200,000 home (20% down) and a $300,000 home (13% down), the monthly payment difference is not just the difference in loan size. The larger loan will carry PMI, a higher interest rate, and higher property taxes and insurance. The true monthly cost gap is often 30% to 40% larger than the loan size difference alone.

What happens if you stretch beyond the 28% rule

Lenders will approve mortgages above 28% of income if your credit is strong and your back-end ratio is low. Some borrowers get approved for 31%, 35%, or even higher. This does not mean you should take it.

A housing payment that consumes 35% or 40% of gross income leaves little room for emergencies, job loss, or income reduction. Property taxes and insurance can rise. Repairs on an older home can cost thousands. If you lose your job or face a pay cut, a stretched mortgage becomes unaffordable quickly. Many financial advisors recommend keeping housing costs at 25% of gross income or lower to maintain financial stability.

The lender's job is to assess whether you will default on the loan, not whether the payment is comfortable for your life. Those are two different questions. A payment you can technically make is not the same as a payment you can afford without sacrificing savings, retirement contributions, or financial security.

How to calculate your personal affordability

Start with your gross monthly income—the amount before taxes, not your take-home pay. Multiply it by 0.28 to find the maximum housing payment a lender will typically approve. Then subtract any existing debt payments (car loans, credit cards, student loans, child support) and multiply your gross income by 0.36 to find the total debt ceiling. The lower of these two numbers is your lender's limit.

Next, decide your own comfort level. If you want to keep housing costs at 25% of income, multiply gross income by 0.25. If you want to reserve money for savings and retirement, subtract those amounts from your take-home pay first, then see what remains for housing after taxes and other essential expenses.

Use a mortgage calculator to convert a monthly payment into a loan amount. If you can afford $1,500 per month and property taxes plus insurance will run $400, your principal-and-interest payment is $1,100. A mortgage calculator will show you what loan amount that supports at current interest rates. Subtract your down payment from the home price to find the loan amount, then work backward to your maximum home price.

The difference between approval and affordability

Getting approved for a $400,000 mortgage does not mean a $400,000 home is the right choice for your budget. Approval is a lender's assessment of risk; affordability is your assessment of comfort and security. A lender cares whether you will default. You should care whether the payment will stress your finances or prevent you from building savings.

Many people who stretch to the lender's maximum end up house-poor: they can make the payment, but they cannot save for emergencies, maintain the home properly, or handle unexpected expenses. If your income drops or your job becomes unstable, a stretched mortgage becomes a crisis.

A practical rule: buy the home that lets you keep housing costs at 25% to 28% of gross income, maintain your existing savings rate, and still have money left over each month for unexpected costs. That home may be smaller or in a different neighborhood than the one the lender will approve, but it will be the one you can actually afford.

Frequently Asked Questions

Does my down payment affect how much I can borrow?

Yes. A larger down payment lowers the loan amount, which lowers your monthly payment and may improve your interest rate. It also eliminates PMI once you reach 20% down. A 10% down payment on a $300,000 home requires a $270,000 loan; a 20% down payment requires only $240,000. The monthly payment difference is roughly $300 to $400, depending on interest rates and property taxes.

What if I have student loans or credit card debt?

Lenders count all debt payments toward your back-end ratio, typically capped at 36% to 43% of gross income. If you owe $300 per month on student loans and $150 on credit cards, that $450 reduces the housing payment the lender will approve. Paying down high-interest debt before applying for a mortgage can increase your borrowing power.

Can I afford a house if I am self-employed?

Yes, but lenders typically require two years of tax returns to verify income. They average your income over that period and may use the lower of the two years. If your income is variable, lenders may be more conservative about how much they will lend. Having a larger down payment and strong credit helps offset this.

What if the lender approves me for more than I think I can afford?

Approval is not the same as affordability. You can decline a larger loan and choose a less expensive home. Many financial advisors suggest keeping housing costs at 25% of gross income rather than the lender's 28% maximum, especially if your income is unstable or you want to prioritize savings and retirement contributions.

How do property taxes and insurance affect my total payment?

Property taxes and insurance can add $300 to $800 per month depending on location and home value. A home in a high-tax state or high-risk flood zone will have a much higher total payment than the same home elsewhere. Always get a property tax estimate and insurance quote for the specific home before you commit to an offer.