The 28/36 rule
Many lenders use two debt-to-income (DTI) ratios as a starting point. Your total housing payment (principal, interest, property tax and insurance) should be no more than 28% of your gross monthly income, and all your debt payments together, including housing, no more than 36%.
Max housing payment = min(28% × monthly income, 36% × monthly income − other debts)
Whichever limit is lower decides your budget. The calculator tells you which one applied: if it's the 36% rule, paying down other debts would raise what you can afford.
From payment to home price
Monthly property tax and insurance are taken out of the housing budget. What's left is the most you can spend on principal and interest, which is turned into a loan amount with the standard amortization formula solved for the principal:
Max loan = P&I · ((1+r)ⁿ − 1) / (r(1+r)ⁿ) Max price = max loan + down payment
Where r is the monthly interest rate (annual rate ÷ 12) and n is the number of monthly payments.
Worked example
Say you earn $90,000 a year, pay $400 a month toward a car loan, have $40,000 for a down payment, and expect a 6.5% rate on a 30-year loan. Property tax is $3,600 a year and insurance $1,500.
- Monthly gross income: $90,000 ÷ 12 = $7,500.
- 28% limit: $7,500 × 0.28 = $2,100. 36% limit: $7,500 × 0.36 − $400 = $2,300. The lower figure, $2,100, is your housing budget.
- Take out tax ($3,600 ÷ 12 = $300) and insurance ($1,500 ÷ 12 = $125). That leaves $1,675 a month for principal and interest.
- At 6.5% over 360 months, every $1 borrowed costs about $0.00632 a month, so $1,675 supports a loan of about $265,003.
- Add the down payment: $265,003 + $40,000 ≈ $305,003 maximum price.
What moves the result
Using the same example, here's how other monthly debts and the interest rate change the answer. With up to $600 of other debt, the 28% rule is the tighter limit, so small debts make no difference. Above that, every extra dollar of debt comes straight out of the housing budget.
| Change from the example | Limiting rule | Max housing payment | Max home price |
|---|---|---|---|
| No other debts | 28% | $2,100 | $305,003 |
| $800/mo other debts | 36% | $1,900 | $273,361 |
| $1,200/mo other debts | 36% | $1,500 | $210,077 |
| Rate 5.5% instead of 6.5% | 28% | $2,100 | $335,004 |
| Rate 7.5% instead of 6.5% | 28% | $2,100 | $279,555 |
Affordability at different incomes
| Annual income | Max housing payment | Max loan | Max home price |
|---|---|---|---|
| $50,000 | $1,167 | $125,250 | $155,250 |
| $75,000 | $1,750 | $217,540 | $247,540 |
| $100,000 | $2,333 | $309,830 | $339,830 |
| $125,000 | $2,917 | $402,119 | $432,119 |
| $150,000 | $3,500 | $494,409 | $524,409 |
Property tax and insurance are fixed amounts here, so they take a bigger share of a small budget. That's why the price doesn't rise in a straight line with income.
What's not included
- Private mortgage insurance (PMI), usually required in the US with less than 20% down
- HOA or condo fees
- Closing costs and moving costs
- Lender-specific limits: many loan programs allow higher ratios, and some lenders are stricter
If you'll pay PMI or HOA fees, add their yearly cost to the insurance field so they come out of the housing budget too. The result is an estimate, not a loan offer.