Two Different Questions
"How much can I borrow?" and "how much should I spend?" have different answers. Lenders answer the first — and they'll often approve payments that leave nothing for retirement savings, childcare, travel, or repairs. The second question is yours to answer, and the 28/36 rule is the classic framework for it.
The 28/36 Rule
Two limits, both measured against gross (pre-tax) monthly income:
- 28% — housing costs. Mortgage principal and interest, property taxes, homeowners insurance (PITI), plus HOA dues if any.
- 36% — all debt combined. Housing costs plus car loans, student loans, credit card minimums, and other debt payments.
You need to fit under both. A household with no other debt is limited by the 28%; a household with a car payment and student loans usually hits the 36% wall first — every $500 of existing monthly debt payments directly shrinks the house budget.
What This Looks Like in Dollars
At a $100,000 salary (gross monthly income of $8,333), the 28% cap allows a $2,333 total housing payment. Assume roughly $400/month for taxes and insurance, leaving about $1,933 for principal and interest. At 6.5% on a 30-year loan, that supports a loan of about $305,000 — with 20% down, a purchase price around $380,000.
Approximate price ranges under the same assumptions (6.5%, 30-year, 20% down, no other debt):
| Salary | Max housing payment | Rough price range |
|---|---|---|
| $60,000 | $1,400 | ~$220,000 |
| $80,000 | $1,867 | ~$300,000 |
| $100,000 | $2,333 | ~$380,000 |
| $150,000 | $3,500 | ~$580,000 |
Two things move these numbers hard: interest rates (each 1% rate increase cuts buying power roughly 10%) and existing debt (a $600 car payment can knock $80,000+ off the price you qualify for under the 36% test).
Why Lender Approval Runs Higher
Mortgage underwriting commonly allows back-end debt-to-income ratios of 43% and sometimes higher — well past the 36% guideline. The lender's math asks "will this loan get repaid?", not "will this family also manage to save for retirement, replace a roof, and survive a layoff?" Borrowing the full approval is how people end up house-poor: technically current on the mortgage, with no margin for anything else.
Treat the pre-approval as a ceiling. The 28/36 rule — or something stricter — is the target.
The Costs Beyond the Payment
First-time buyers consistently budget for the down payment and stop there. The rest:
- Closing costs: typically 2–5% of the purchase price in lender, title, and escrow fees plus prepaid taxes and insurance — cash due at closing on top of the down payment
- PMI: with less than 20% down, private mortgage insurance adds roughly 0.3–1.5% of the loan per year until you reach 20% equity
- Maintenance: plan on ~1% of the home's value per year, lumpy and unavoidable — furnaces and roofs don't ask if it's a good time
- The tax-and-insurance ratchet: property taxes and insurance premiums rise over the years, pushing your "fixed" payment up
A useful stress test: could you still make the payment if one income stopped for six months, or if the payment rose 10%? If the answer requires everything going right, the price is too high.
If the Numbers Say "Not Yet"
That's a real answer with real options: buy a smaller place or different area, pay down the car loan first (it may free up more buying power than a bigger down payment), save toward 20% to skip PMI, or rent another year while rates or your income improve. Renting below your means while saving is a strategy, not a failure.
Key Takeaway
Cap housing at ~28% of gross income and all debt at ~36%, then check the result against your actual budget — savings goals included. Buy the house that fits under those numbers at today's rates, not the one the pre-approval letter dangles. Run your own salary, debts, and local taxes through the numbers before you fall in love with a listing.