How Much House Can I Afford? The 28/36 Rule With an Example

Lenders commonly test two limits and use whichever is lower. The housing ratio caps your full housing payment (principal, interest, property tax, insurance and any HOA dues) at a share of gross monthly income, conventionally 28%. The total debt ratio caps housing plus all other monthly debt payments, conventionally 36%.

A worked example

Take a hypothetical household earning $90,000 a year, with $500 a month in other debt payments and a $40,000 down payment, at 6.5% over 30 years. Assume property tax at 1.1% and insurance at 0.4% of the home's value each year.

Limit	Monthly amount allowed
Housing ratio, 28% of $7,500	$2,100
Total debt ratio, 36% of $7,500, minus $500 of other debt	$2,200

The housing ratio is the lower limit, so it sets the budget at $2,100 a month. That supports a home of about $310,800:

Payment part	Monthly
Principal and interest	$1,712
Property tax	$285
Insurance	$104
Total	$2,100

Try your own numbers in the home affordability calculator.

When paying off debt helps, and when it does not

In this example, paying off the $500 of other debt would not raise the price range. The housing ratio is already the tighter limit, so the total debt ratio has no effect.

Now raise the other debt to $1,100 a month. The total debt ratio allows only $1,600, which drops below the housing limit, and the price range falls to about $244,700. Here, clearing debt would raise the ceiling substantially.

So check which limit is binding before paying down a loan just to qualify for more.

The maximum is not a target

These ratios use gross income, before taxes, retirement saving and childcare. They also leave out PMI on down payments under 20%, credit-score pricing, and the rules of specific loan programs. A lender's pre-approval is the real test, and many households choose to borrow well below the maximum.

Source: CFPB: Buying a house.