Lenders don't start from the house price. They start from your monthly income and ask how much of it can go to housing and debt. Turn that monthly limit back into a loan amount, add your down payment, and you have a price range.
The 28/36 rule, explained
The rule uses two debt-to-income (DTI) ratios, both calculated on gross (pre-tax) monthly income:
- Front-end ratio, 28%: your total monthly housing cost (principal and interest, property tax, homeowners insurance, mortgage insurance and any HOA dues) divided by gross monthly income.
- Back-end ratio, 36%: that housing cost plus your other monthly debt payments, divided by gross monthly income.
Your budget is whichever limit is lower. With few other debts the 28% limit sets the budget. With a car payment or student loans, the 36% limit often takes over.
The 28/36 split is a traditional guideline, not a law. Lenders and loan programs set their own maximums, and many approve higher back-end ratios for borrowers with strong credit or cash reserves. FHA loans, for example, use higher standard limits. Being approved at a higher ratio doesn't make the payment any easier to live with.
What counts as debt (and what doesn't)
For the back-end ratio, lenders count the minimum payments that show on your credit report or that you're legally required to pay:
- Car loans and leases
- Student loans
- Credit card minimum payments, even if you pay the full balance
- Personal loans and other installment loans
- Child support and alimony
Everyday bills such as utilities, phone, groceries, childcare and health insurance are not counted, but they still come out of your paycheck. That is the main reason a lender's maximum can feel tight.
Worked example: a $90,000 salary
Assume a 30-year fixed loan at 6.5%, $30,000 down, property tax of 1.1% of the price per year, homeowners insurance of $1,800 a year, PMI of 0.5% of the loan a year (because the down payment is under 20%), and no other debts.
- Gross monthly income: $90,000 ÷ 12 = $7,500.
- Front-end limit: 28% × $7,500 = $2,100 a month for all housing costs.
- Back-end limit: 36% × $7,500 = $2,700. With no other debts, the 28% limit is the lower one.
- Solve for the price whose monthly cost fits $2,100. The calculator finds about $281,000, a loan of $251,000.
Here is how that $2,100 monthly cost breaks down:
| Item | Per month |
|---|---|
| Principal and interest | $1,588 |
| Property tax | $258 |
| Homeowners insurance | $150 |
| PMI | $105 |
| Total housing cost | $2,100 |
Notice that roughly a quarter of the payment isn't the loan at all. Tax, insurance and PMI vary widely by state and property, so use your own local figures.
How much house by salary
Same assumptions, run at different incomes. The middle column adds $1,000 a month of other debt payments (say, a car loan and student loans). The last column uses a calmer 25% housing ratio with no other debts.
| Salary | 28/36, no debts | 28/36, $1,000/mo debts | 25% housing |
|---|---|---|---|
| $60,000 | $190,000 | $116,000 | $170,000 |
| $90,000 | $281,000 | $229,000 | $252,000 |
| $120,000 | $373,000 | $347,000 | $333,000 |
| $150,000 | $464,000 | $464,000 | $415,000 |
Prices are rounded to the nearest $1,000. Where the middle column is lower, the debts pushed the 36% back-end limit below the 28% housing limit. Where it matches, the debts fit inside the gap between the two limits and changed nothing.
What changes the answer most
The interest rate
Rate has the largest effect. A higher rate means more of each payment goes to interest, so the same monthly budget supports a smaller loan. Compare rates in the mortgage calculator before you shop.
The down payment
Each extra dollar down adds a dollar to your price, and reaching 20% down on a conventional loan removes PMI, which frees up more of the monthly budget for the loan itself. If you do pay PMI, federal law lets you ask to cancel it once your balance reaches 80% of the home's original value, and it generally ends automatically at 78% (see the CFPB's PMI explainer).
Taxes, insurance and HOA dues
A condo with a $400 HOA fee can afford a much smaller loan than a house with none. Property tax rates also vary several-fold between states.
Costs the ratios leave out
DTI limits only look at your monthly payment. Buying a home also takes cash up front and money for upkeep:
- Closing costs: lender fees, title insurance, appraisal, prepaid taxes and insurance. They often add a few percent of the price on top of the down payment, so get a Loan Estimate and read it line by line.
- Maintenance and repairs: roofs, water heaters and appliances wear out. Many owners budget around 1% of the home's value a year, more for older homes.
- Utilities and commuting: a bigger or farther-out house can cost noticeably more to heat, cool and drive to.
- Reserves: keeping several months of expenses in savings after closing protects you if income drops, and some lenders look at reserves when they approve higher ratios.
If paying for these would drain your savings, aim for a price below the 28/36 maximum. The 25% column in the table above is a reasonable place to start.
How to work out your own number
- Add up your gross annual income, including a co-borrower's.
- List your monthly debt payments from your credit report.
- Decide on a down payment, keeping cash back for closing costs and an emergency fund.
- Get a realistic rate quote and look up local property tax and insurance costs.
- Enter it all into the Home Affordability Calculator. It shows the 28/36 maximum, a more comfortable figure, and which limit is binding.
- If you're unsure whether buying makes sense at all, compare it with renting in the Rent vs Buy Calculator.
Carrying expensive consumer debt shrinks your budget twice: once through the back-end ratio and again through your credit score. If that's you, read debt snowball vs avalanche first.
This guide is general information, not financial advice. Lenders' actual limits depend on the loan program, your credit and your reserves.