Most first-time buyers ask a bank how much they can borrow. It’s a reasonable place to start, but lenders approve loans based on what you can repay, not on what leaves room for savings, repairs and a life. This guide shows the math lenders use, and how to find a number you’ll be comfortable with.
The 28/36 rule
Most lenders start with two debt-to-income ratios. Your total housing payment, meaning principal, interest, property tax, insurance and any HOA fee, should stay under 28% of your gross monthly income. All your debt payments together, including housing, car loans, student loans and card minimums, should stay under 36%.
Some loan programs allow higher ratios, especially FHA loans. But the higher you go, the less cushion you have when something breaks or prices rise.
A worked example
Say your household earns $100,000 a year, or $8,333 a month, and you have a $400 car payment.
- 28% housing limit
- $2,333/mo
- 36% total debt limit, minus the car
- $2,600/mo
- Your maximum housing payment
- $2,333/mo
At a 6.5% rate on a 30-year loan with 20% down, 1.1% property tax and $1,800 a year for insurance, that payment supports a home price of about $366,000. If rates were a point lower, the same payment would stretch further, which is why rate shopping matters so much.
Costs people forget
- Closing costs usually run 2% to 5% of the loan amount, paid on top of your down payment.
- Maintenance averages 1% to 2% of the home’s value per year. Roofs, water heaters and HVAC systems all wear out.
- PMI applies if you put down less than 20%, adding roughly 0.3% to 1.5% of the loan per year.
- Moving and furnishing costs add up fast in the first year.
Your comfortable number
The 28/36 rule is a ceiling, not a target. Many financial planners suggest aiming for a housing payment closer to 25% of take-home pay, so you can keep saving for retirement and emergencies. Before you shop, work backward from a monthly payment you’d be happy to make even in a tight month, then let that payment set your price range.