How Much House Can I Afford? The 28/36 Rule, Worked Out

"How much house can I afford?" sounds like a question about houses. It is actually a question about ratios — two of them, applied to your gross income, in a specific order that most people get backwards. This is the lender's test, the 28/36 rule, explained with the arithmetic shown. It ends with a ceiling, and the last section is about why a ceiling is not a target.

The two caps

Lenders test your housing costs against two limits, and the lower of the two wins:

• The 28% cap (front end): your total housing payment — principal, interest, property tax and insurance — should be at most 28% of your gross monthly income.
• The 36% cap (back end): housing plus every other monthly debt payment — car loans, student loans, minimum credit-card payments — should be at most 36% of gross monthly income.

The second cap is the one that surprises people: your other debts eat into your housing allowance dollar for dollar before housing gets anything.

The order of operations people get wrong

The caps apply to the whole housing payment, not just the loan. So the calculation runs in this order: work out the cap, subtract tax and insurance first, and whatever is left is what services the loan. Buyers who start from "the loan payment I can carry" and forget the tax-and-insurance line overestimate their ceiling by thousands — in high-tax areas, by tens of thousands. Our Home Affordability Calculator runs the calculation in this order and tells you which of the two rules limited you.

The worked example: $90,000 income

Income $90,000 a year ($7,500 a month), $400 a month of existing debts, a $60,000 down payment, a loan at 6.5% for 30 years, and $6,000 a year of tax and insurance:

That ceiling is about 3.5 times income. Notice which rule did the limiting: the 28% cap, not the debts. With $400 of monthly debt this household still had $200 of back-end room to spare — the front-end rule bound first.

The same machinery, bigger numbers

Now scale it: $120,000 income, $650 a month of debts, $80,000 down, 6% for 30 years, $7,200 a year of tax and insurance. The 28% cap gives $2,800; the 36% cap gives $3,600 minus $650 = $2,950 — the 28% rule binds again. Tax and insurance take $600, leaving $2,200 a month for principal and interest, which supports a loan of $366,942. Add the down payment: a ceiling price of $446,942. Same machine, same order of operations — only the inputs changed. Feed a candidate price into the Mortgage Calculator afterwards to see the full payment it produces, and use the Down Payment Calculator for the cash-to-close side of the same purchase, including the 20% line where PMI falls away.

The three levers that move your ceiling

• Less monthly debt. Inside the 36% cap, every debt dollar is subtracted before housing gets its share. Retiring a $300 car payment can raise a debt-bound household's ceiling more than a raise does — which is why the calculator names the binding rule: if the 36% cap bound you, debt is your lever; if the 28% cap bound you, it isn't.
• A bigger down payment. It raises the price ceiling without raising the payment by a cent, because the caps only ever see the payment. Saving longer is the one lever that moves the ceiling while leaving both ratios untouched.
• The tax-and-insurance line. Two buyers with identical incomes, debts and down payments get different ceilings in different tax states, because the subtraction happens before the loan is sized. A house that fits the ratio in a low-tax county can fail it across a state line at the same price.

The honest caution

The 28/36 maximum is what a lender will count you able to afford, calculated on gross pay — the pay before tax, before retirement contributions, before life. Your household budget runs on take-home. A ceiling is the most the test allows, not a recommendation to spend it, and the households that treat it as a target are the ones who end up house-rich and cash-poor. Run the ratio to learn the boundary; then decide, from your actual budget, how far inside it you want to live.