Start with your gross monthly income and the 28/36 rule

The most common way to figure out your price range is the 28/36 rule. This rule says your housing payment should not exceed 28% of your gross monthly income (the money you earn before taxes), and your total debt payments should not exceed 36% of that same income.

Here is how to use it: Take your gross monthly income and multiply it by 0.28. That number is the maximum your lender will typically allow for a housing payment. If you earn $5,000 a month gross, 28% is $1,400. That $1,400 covers your mortgage payment, property taxes, homeowners insurance, and mortgage insurance if you put down less than 20%.

The 36% rule works the same way but includes everything: your housing payment plus car loans, student loans, credit cards, and any other debt. If you earn $5,000 a month, 36% is $1,800. Subtract your other debt payments from that $1,800, and what remains is what you can spend on housing.

Key Takeaways

  • The 28/36 rule limits your housing payment to 28% of gross monthly income and your total debt to 36%, but lenders may use different numbers based on your credit score and down payment.
  • Your housing payment includes the mortgage principal and interest, property taxes, homeowners insurance, and mortgage insurance — not just the loan itself.
  • Use an online mortgage calculator to convert your maximum monthly payment into a home price, because the relationship between payment and price depends on interest rates and loan length.
  • Your down payment size directly affects how much you can borrow: a larger down payment means a lower loan amount and lower monthly payment for the same home price.
  • Lenders will also look at your credit score, debt-to-income ratio, and savings, so the maximum they will lend you may be lower than what the 28/36 rule suggests.

Convert your maximum payment into a home price using a mortgage calculator

Knowing your maximum monthly payment is only half the picture. You also need to know what home price that payment actually buys. A $1,400 monthly payment does not equal the same home price everywhere, because it depends on the interest rate you may have access to for and how long you borrow the money.

Use a mortgage calculator — available free from Bankrate, NerdWallet, or your bank's website — and enter three numbers: your maximum monthly payment, the interest rate you expect to may have access to for, and the loan term (usually 15 or 30 years). The calculator will show you the loan amount you can afford. If you have a down payment saved, add that to the loan amount to get your home price.

Example: If your maximum payment is $1,400, the interest rate is 6.5%, and you are borrowing over 30 years, you can afford roughly a $230,000 loan. If you have $50,000 saved for a down payment, your home price target is around $280,000. Interest rates change constantly, so check current rates before you calculate — a 1% difference in the rate changes your buying power by tens of thousands of dollars.

Account for the full cost of homeownership, not just the mortgage

Your housing payment includes more than the mortgage itself. Lenders bundle four things into what they call your PITI: Principal and Interest (the loan payment), Property taxes, Insurance, and (if applicable) mortgage Insurance.

Property taxes vary wildly by location — from under 0.5% of home value per year in some states to over 2% in others. Insurance costs depend on the home's age, location, and your credit score. Mortgage insurance (PMI) is required if you put down less than 20% and typically costs 0.5% to 1.5% of the loan amount per year. A mortgage calculator that includes these costs will give you a more realistic picture than one that only shows principal and interest.

Beyond PITI, you will also pay homeowners association fees (if applicable), maintenance and repairs, utilities, and property upkeep. Many lenders ignore these costs when calculating what you can afford, but you should not. Budget an extra 1% to 2% of your home's value per year for maintenance and repairs alone.

Understand how your down payment changes what you can afford

The size of your down payment directly affects your buying power. A larger down payment means you borrow less money, which lowers your monthly payment and lets you afford a more expensive home on the same income.

Down payments also affect whether you pay mortgage insurance. If you put down 20% or more, you avoid PMI entirely. If you put down less than 20%, the lender adds PMI to your monthly payment. On a $300,000 home with a 10% down payment, PMI might add $150 to $300 per month. That same home with a 20% down payment has no PMI.

Some first-time homebuyers can put down as little as 3% to 5%, but the lower your down payment, the higher your interest rate and monthly payment will be. Before you decide how much to put down, compare the cost of PMI against the opportunity cost of using that money elsewhere — paying off debt, building an emergency fund, or investing.

Check your credit score and debt-to-income ratio before talking to a lender

Lenders do not just use the 28/36 rule. They also look at your credit score, your debt-to-income ratio, and how much cash you have in savings. A higher credit score gets you a lower interest rate, which increases your buying power. A lower credit score increases your rate and decreases what you can borrow.

Your debt-to-income ratio is the percentage of your gross monthly income that goes to debt payments. If you earn $5,000 a month and pay $1,200 toward existing debts (car loans, student loans, credit cards), your ratio is 24%. Lenders prefer to see this below 43%, but some will go higher if your credit score is strong. If your ratio is already high, paying down debt before you apply for a mortgage will increase your buying power.

Pull your credit report from AnnualCreditReport.com (the only free site authorized by the federal government) and check for errors. Dispute any mistakes before you apply for a mortgage. If your score is below 620, most conventional lenders will not work with you, though FHA loans are available with scores as low as 500.

Know the difference between what you can afford and what you should spend

The maximum a lender will give you is not the same as the maximum you should spend. Lenders use the 28/36 rule as a floor, not a ceiling — they assume you will spend every dollar the rule allows. But you might have other goals: saving for retirement, paying for childcare, taking a vacation, or building a larger emergency fund.

A useful exercise is to calculate what your actual monthly expenses are right now, then add the housing payment a lender would approve. If the total is more than you can comfortably pay while still meeting your other goals, aim lower than what the lender says you can afford. Many financial advisors suggest keeping your housing payment to 25% of gross income instead of 28%, which gives you more breathing room.

Also consider what happens if interest rates rise, property taxes increase, or you lose income. A home you can barely afford on your current salary becomes unaffordable if you take a pay cut or face a job loss. Build a buffer into your calculation.

Get pre-approved to see what lenders will actually offer you

The 28/36 rule and mortgage calculators give you a starting point, but the real number comes from a lender. A pre-approval is a written statement from a bank or mortgage company saying how much they will lend you based on your actual income, credit, and debts. It is not a may provide, but it is much more specific than a rule of thumb.

To get pre-approved, contact a mortgage lender or bank and provide recent pay stubs, tax returns, bank statements, and a list of your debts. The lender will pull your credit report and run the numbers. Within a few days, you will have a pre-approval letter stating your maximum loan amount and the interest rate you may have access to for.

Pre-approval also signals to sellers that you are a serious buyer. In a competitive market, a pre-approval letter can strengthen an offer. You can get pre-approved from multiple lenders without penalty — each inquiry counts as one "hard pull" on your credit, and multiple pulls within 14 days typically count as a single inquiry for credit scoring purposes.

Frequently Asked Questions

What if I have student loans or other debt — does that reduce how much house I can afford?

Yes. The 36% rule includes all debt payments, not just housing. If you owe $300 a month on student loans and $200 on a car, that is $500 already counted against your 36% limit. On a $5,000 monthly income, your total debt limit is $1,800, so you have only $1,300 left for housing. Paying down debt before you buy increases your housing budget.

Does the 28/36 rule apply to everyone, or do some lenders use different numbers?

Lenders use the 28/36 rule as a baseline, but many will stretch it for borrowers with strong credit scores, large down payments, or significant savings. Some go as high as 43% debt-to-income ratio. Government-backed loans like FHA and VA loans sometimes allow higher ratios. Always ask your lender what their specific limits are.

How much should I have saved for a down payment before I start looking?

Conventional loans typically require 5% to 20% down, though some programs allow 3%. FHA loans require 3.5% down. The more you save, the lower your monthly payment and the better your interest rate. Many experts recommend saving at least 10% to 20% to avoid PMI and have money left for closing costs and emergencies.

What if the maximum I can afford feels too high — is that a sign I should spend less?

Possibly. Lenders approve based on income and debt, not on your actual comfort level or other financial goals. If the approved amount would leave you with no room for savings, retirement contributions, or unexpected expenses, aim for a lower price. A home you can comfortably afford is better than one that stretches your budget to the limit.

How do interest rates affect how much house I can afford?

Interest rates have a large effect. A 1% increase in your rate can reduce your buying power by $50,000 or more on the same monthly payment. Check current rates before you calculate, and ask your lender about rate locks — a may provide that your rate will not change between pre-approval and closing, usually for 30 to 60 days.