To calculate an affordable mortgage, start with your gross monthly income and multiply it by 0.28. That gives you the maximum you should spend on total housing costs each month, including your mortgage payment, property taxes, insurance, and any homeowners association fees. For someone earning $6,000 a month before taxes ($72,000 a year), that ceiling is $1,680. From there, you can work backward to find the home price that fits your budget.
The 28/36 Rule Explained
The most widely used guideline for mortgage affordability is the 28/36 rule. The first number means your housing costs should stay at or below 28% of your gross monthly income. The second number means your total monthly debt payments, including housing, car loans, student loans, credit card minimums, and any other obligations, should not exceed 36% of gross income.
Here’s what that looks like with real numbers. If your household earns $90,000 a year, your gross monthly income is $7,500. Under the 28/36 rule:
- Maximum housing payment: $7,500 × 0.28 = $2,100 per month
- Maximum total debt: $7,500 × 0.36 = $2,700 per month
If you already pay $600 a month toward a car loan and student loans, your total debt allowance leaves only $2,100 for housing, which lines up with the 28% cap. But if your existing debts total $1,000 a month, the 36% rule would cap your housing at $1,700, even though the 28% rule allows $2,100. The binding constraint is whichever limit you hit first.
What Lenders Actually Allow
The 28/36 rule is a personal budgeting guideline. Lenders use a related but different measure called the debt-to-income ratio (DTI), which is simply your total monthly debt payments divided by your gross monthly income. For conventional loans underwritten manually, Fannie Mae caps total DTI at 36%, with exceptions allowing up to 45% for borrowers with strong credit scores and cash reserves. Loans run through Fannie Mae’s automated underwriting system can be approved with DTI ratios as high as 50%.
That means a lender might approve you for a much larger mortgage than the 28/36 rule suggests is comfortable. A 50% DTI on $7,500 monthly income would mean $3,750 going to debt each month, leaving just $3,750 for taxes, food, savings, and everything else. Getting approved for a loan and being able to live comfortably with the payment are two very different things. The 28/36 rule exists precisely because lender maximums can stretch your budget dangerously thin.
How to Work Backward to a Home Price
Your maximum monthly housing payment includes more than just the loan itself. You need to account for four components: principal and interest on the mortgage, property taxes, homeowners insurance, and private mortgage insurance (PMI) if your down payment is less than 20%. This combined figure is often called PITI.
Start by estimating the non-mortgage costs. Property tax rates vary by location, but you can look up the rate for any area on your county assessor’s website. Homeowners insurance typically runs between $1,000 and $3,000 a year for a standard policy, though this depends heavily on your area and the home’s characteristics. PMI ranges from 0.46% to 1.50% of the original loan amount per year, with the rate depending on your credit score. A borrower with a score in the 680 to 699 range pays roughly 0.98% annually, while someone in the 620 to 639 range pays closer to 1.50%.
Subtract your estimated monthly property tax, insurance, and PMI costs from your maximum housing payment. What remains is the amount available for your actual mortgage payment (principal and interest). You can then plug that number into any online mortgage calculator along with your expected interest rate and loan term to see the loan amount it supports. Add your down payment to that loan amount, and you have your maximum purchase price.
A Worked Example
Say your household income is $100,000 a year, or $8,333 per month. Your 28% housing cap is $2,333. You estimate monthly property taxes at $350, homeowners insurance at $150, and PMI at $130 (assuming a $300,000 loan at roughly 0.5% annually). That’s $630 in non-mortgage costs, leaving $1,703 for principal and interest.
At a 7% interest rate on a 30-year fixed mortgage, $1,703 per month supports a loan of roughly $256,000. If you have $50,000 saved for a down payment, your target price is around $306,000. Now check the back end: if you pay $400 a month on other debts, your total debt load would be $2,733, which is about 33% of gross income, safely under the 36% ceiling.
Costs Beyond the Monthly Payment
The purchase price isn’t the only cash you need. Closing costs typically run between 2% and 5% of the home’s purchase price. On a $300,000 home, that’s $6,000 to $15,000. These fees cover things like the loan origination charge (usually 0.5% to 1% of the loan amount), the appraisal, title insurance, and various state and local transfer fees. Some of these can be negotiated or, in certain cases, rolled into the loan, but you should plan to pay most of them out of pocket at closing.
After closing, you’ll want cash reserves to cover unexpected repairs and income disruptions. A reasonable target is three to six months of mortgage payments sitting in savings after you’ve paid your down payment and closing costs. If your monthly housing payment is $2,300, that means keeping $6,900 to $13,800 accessible. Draining every dollar of savings to maximize your down payment can leave you vulnerable to the first surprise your new home throws at you.
Adjusting for Your Real Life
The 28/36 rule is a starting point, not a verdict. Several factors might push your comfortable number lower or allow it to go slightly higher.
If you have irregular income (freelance, commission, seasonal work), budgeting at 28% of your average month can be risky. Consider using your lowest earning months as the baseline instead. If you’re planning for major upcoming expenses like childcare, a career change, or graduate school, factor those into your debt side of the equation even if you don’t owe that money yet.
On the other hand, if you have no other debts and a large emergency fund, you might be comfortable spending slightly above 28% on housing while still keeping total obligations well under 36%. The key question is whether you can make the payment, cover your other expenses, and still save meaningfully each month. If the mortgage would force you to stop contributing to retirement or eliminate all discretionary spending, the home is too expensive regardless of what any formula says.
Quick Affordability Worksheet
You can run this calculation in five minutes with a calculator and a few estimates:
- Step 1: Find your gross monthly income (annual salary divided by 12, or average monthly earnings if self-employed).
- Step 2: Multiply by 0.28 to get your maximum housing payment.
- Step 3: Add up all your other monthly debt payments. Multiply gross income by 0.36 and subtract those debts. If the result is less than your Step 2 number, use the lower figure.
- Step 4: Estimate monthly property tax, homeowners insurance, and PMI. Subtract these from your housing payment limit.
- Step 5: Use the remaining amount as your principal-and-interest budget. Enter it into a mortgage calculator with current interest rates to find your maximum loan size, then add your down payment to get your price range.
Run this exercise before you start shopping, and again once you have actual tax rates and insurance quotes for specific properties. The gap between a rough estimate and a property-specific calculation can be tens of thousands of dollars in either direction.