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How Much House Can I Afford? Use the 28/36 Rule

January 22, 20256 min read

Most people look at the monthly payment and forget everything else. That's how buyers end up house-poor — technically able to pay the mortgage but cash-strapped after it. The right question isn't "can I get approved?" but "can I afford this without financial stress?"

The 28/36 Rule Explained

Banks use the 28/36 rule as a baseline for mortgage approval. Two thresholds:

28%: Total housing costs (mortgage P&I + property taxes + insurance + HOA) should not exceed 28% of gross monthly income.
36%: Total monthly debt (housing + car loans + student loans + credit cards) should not exceed 36% of gross monthly income.

Example: $80,000/year gross income = $6,667/month. Max housing payment: $6,667 × 0.28 = $1,867. If you already pay $400/month in car and student loans, total debt cap is $6,667 × 0.36 = $2,400 — leaving only $2,000 for housing, tighter than the 28% limit.

Always use gross income for the formula but budget based on net take-home. A 28%-of-gross payment might represent 35%+ of take-home pay once taxes are deducted — an uncomfortable squeeze.

What Actually Goes Into Your Monthly Payment

"Monthly payment" means PITI — Principal, Interest, Taxes, and Insurance. Most online calculators only show P&I. Add the rest before deciding what you can afford:

Property taxes: typically 0.5–2.5% of home value per year (varies significantly by state)
Homeowners insurance: roughly $100–200/month for a $300,000 home
PMI (if under 20% down): 0.5–1.5% of loan amount annually — $125–375/month on a $300k loan
HOA fees: $0 to $600+/month depending on the community

A $300,000 home at 7% with 10% down has a P&I payment of about $1,796/month. Add taxes, insurance, and PMI and total PITI easily hits $2,200–$2,400.

How the Down Payment Changes Everything

The down payment has two compounding effects: it reduces the loan amount (lowering P&I) and, if you hit 20%, eliminates PMI entirely.

20% down on $300k: $1,610/month P&I, no PMI
10% down on $300k: $1,796/month P&I + ~$200 PMI = ~$2,000/month
5% down on $300k: $1,895/month P&I + ~$280 PMI = ~$2,175/month

Going from 5% to 20% down on a $300k home saves roughly $565/month — that's $6,780 per year, or $135,600 over the first 20 years before you factor in the PMI dropping off.

The Costs Nobody Warns You About

Closing costs run 2–5% of the loan value — typically $6,000–15,000 on a $300k purchase, paid in cash at closing. This is separate from your down payment.

Ongoing maintenance is the sleeper expense. Budget 1–2% of the home's value per year: a $300k home needs $3,000–6,000 annually for roofs, HVAC, appliances, plumbing, and the other things that inevitably break. Skipping this budget line is how homeowners end up with credit card debt after a $4,000 furnace replacement.

Rule of thumb: if housing (PITI + monthly maintenance reserve) exceeds 30% of net take-home pay, you're stretching. At 35%+, one financial shock puts you in serious trouble.

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Frequently asked questions

Should I use gross or net income for affordability?

Lenders use gross income for approval calculations. You should budget based on net take-home pay. A payment that's 28% of gross can easily be 38% of net — an uncomfortable amount to allocate to one expense. Run both calculations before committing.

Can I buy a house with student loans?

Yes, but student loan payments count toward the 36% total debt cap. If you pay $600/month in student loans, that comes directly off your housing budget. A $6,667/month earner with $600 in student loans has a max housing payment of $1,800 under the 36% rule — not $1,867.

How much cash should I have before buying?

At minimum: down payment + closing costs (2–5% of purchase price) + 3–6 months emergency fund + a $5,000–10,000 buffer for immediate repairs. Buying a home should not zero out your savings. Home ownership gets expensive fast when something breaks.

Is rent-vs-buy always a financial question?

No. Buying makes the most financial sense when you plan to stay for 5+ years (to recoup transaction costs), the local price-to-rent ratio is reasonable, and your financial situation is stable. For mobile lifestyles or expensive markets, renting is often the smarter financial choice even if it feels less "productive."

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