Start with your gross monthly income
The amount you can afford to pay each month depends first on how much money comes in. Most lenders use your gross monthly income — that is, what you earn before taxes, health insurance, or retirement contributions come out of your paycheck. If you are salaried, divide your annual salary by 12. If you are paid hourly, multiply your hourly rate by the number of hours you typically work per week, then by 52 weeks, then divide by 12.
If your income varies — you work on commission, are self-employed, or have seasonal work — lenders usually average your income over the past two years. Bring recent tax returns and pay stubs to show what you actually earned.
Write down this number. Everything that follows is a percentage of it.
Key Takeaways
- Most lenders will not lend you more than 28 percent of your gross monthly income for the mortgage payment itself (principal, interest, taxes, and insurance combined).
- Your total monthly debt payments — mortgage, car loans, credit cards, student loans — should not exceed 36 to 43 percent of gross income, depending on the lender.
- The 28/36 rule is a lender's ceiling, not a personal budget; you may be able to afford less and still have money for food, utilities, and emergencies.
- Down payment size, interest rates, and loan length all change your monthly payment for the same house price, so compare different loan scenarios before deciding what you can afford.
- Your actual comfort level matters more than what a lender approves; many people who max out their mortgage have little left over for unexpected costs.
The 28 percent rule for housing costs
Lenders use a simple measure called the front-end ratio or housing ratio. It says your monthly mortgage payment — including principal, interest, property taxes, and homeowners insurance — should not exceed 28 percent of your gross monthly income.
Here is how to calculate it: multiply your gross monthly income by 0.28. That is the maximum monthly payment most lenders will approve. If your gross income is $5,000 per month, 28 percent is $1,400. That $1,400 covers your mortgage payment, property taxes, homeowners insurance, and mortgage insurance if you put down less than 20 percent.
This is a ceiling, not a recommendation. Some lenders go up to 31 percent for borrowers with strong credit and savings. Others stay at 28 percent or lower. Ask your lender what ratio they use before you start house hunting.
The 36 percent rule for all your debt
Lenders also look at your back-end ratio or debt-to-income ratio. This measures all your monthly debt payments — not just the mortgage, but car loans, credit cards, student loans, and any other regular payments you owe — as a percentage of gross income.
Most lenders want your total debt to stay below 36 percent of gross monthly income. Some will go up to 43 percent if you have a large down payment, excellent credit, or significant savings. If your gross income is $5,000 per month, 36 percent is $1,800 total. If you already pay $300 on a car loan and $150 on student loans, you have $1,350 left for the mortgage payment.
This rule catches something the 28 percent rule misses: you might have room for a large mortgage payment, but other debts eat into what you can actually afford. Pay down car loans or credit cards before you apply for a mortgage, and your approved loan amount goes up.
How down payment and interest rates change your monthly cost
Two people with the same income and the same house price can have very different monthly payments. The difference comes from the down payment and the interest rate.
A larger down payment means you borrow less money, so your monthly payment is smaller. If you put down 20 percent instead of 5 percent on a $300,000 house, your loan is $240,000 instead of $285,000. You also avoid mortgage insurance, which adds $100 to $300 per month depending on the loan size. A bigger down payment is the single fastest way to lower your monthly cost.
Interest rates matter just as much. A 6 percent interest rate and a 7 percent interest rate on the same $240,000 loan create a $150 to $200 monthly difference over a 30-year loan. Shop around with multiple lenders, and ask about rate locks. A quarter-point difference sounds small until you see it on your monthly statement for 360 payments.
Loan length also changes the payment. A 15-year mortgage costs more per month than a 30-year mortgage on the same amount borrowed, because you pay it back faster. A 30-year mortgage costs less per month but you pay more interest overall. There is no right answer — it depends on your monthly budget and how long you plan to stay in the house.
What you can afford is not the same as what a lender will approve
A lender will approve you for a mortgage based on the 28/36 rule and your credit score. That approval is not a recommendation for how much to borrow. It is the maximum they will lend, not the amount that leaves you comfortable.
If you max out your mortgage payment, you have little left over for property maintenance, utilities, groceries, car repairs, or medical emergencies. A house that costs 28 percent of your income to pay for can cost another 5 to 10 percent in taxes, insurance, maintenance, and utilities. Add that to your mortgage and you are spending 33 to 38 percent of income on housing alone — before you pay for anything else.
Many financial advisors suggest keeping your housing payment to 25 percent of gross income or less, leaving more room for other expenses and savings. This is tighter than what lenders allow, but it gives you breathing room. Calculate what you would actually spend each month on utilities, maintenance, and property taxes for the house you are considering, then add that to the mortgage payment. If the total is more than you want to spend, look at a less expensive house or save for a larger down payment.
How to work backward from your budget
Instead of asking what a lender will approve, ask what monthly payment fits your actual life. Start with your gross monthly income and decide what percentage you want to spend on housing. If you choose 25 percent, multiply your income by 0.25. That is your target monthly payment.
Then subtract the costs that are not part of the mortgage payment itself: property taxes, homeowners insurance, and mortgage insurance if your down payment is less than 20 percent. Your local tax assessor can give you an estimate of property taxes for a house at a certain price. Insurance companies quote rates based on the house and your location. Mortgage insurance varies by loan size and down payment, but online calculators show estimates.
What is left is the amount you can borrow for principal and interest. Use an online mortgage calculator to see what house price that translates to, given your down payment size and the current interest rate. That is the realistic price range for you.
Frequently Asked Questions
Can I afford a mortgage if I am self-employed?
Yes, but lenders require more documentation. Most want to see two years of tax returns and may average your income across both years if it has grown or shrunk. Some want to see business bank statements or profit-and-loss statements. Start gathering these documents before you meet with a lender so you know what you have.
What if I have a co-borrower or co-signer?
A co-borrower is someone whose income and debt both count toward the mortgage. A co-signer is someone who promises to pay if you do not, but their income usually does not count. Lenders add a co-borrower's gross income to yours when calculating the 28/36 ratios, so a second income can let you borrow more. Make sure both people understand the legal obligation before signing.
Does my credit score affect how much I can afford?
Your credit score does not change the 28/36 rule, but it changes the interest rate you are offered. A higher score gets a lower rate, which means a lower monthly payment on the same loan amount. A lower score gets a higher rate, which means a higher monthly payment. Shop with multiple lenders even if your score is not perfect — rates vary widely.
What if my income is about to increase?
Lenders base approval on income you have already earned, not income you expect to earn. If you are starting a new job or getting a raise, wait until you have pay stubs from the new income before you apply. Lenders want to see at least one or two months of paystubs at the new rate.
Should I use an online calculator or talk to a lender?
Use both. Online calculators show you the math and let you experiment with different down payments and interest rates. A lender can tell you what rate you actually may have access to for, what your specific debt-to-income ratio is, and what documents you need. The calculator is a starting point; the lender gives you the real number.