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

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.

"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.

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.

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.