Buying a home is likely the largest financial transaction you'll ever make—and the stakes of getting the affordability calculation wrong are enormous. Too much house means years of financial stress, canceled vacations, and depleted retirement savings. Too little house means outgrowing your space and moving costs in five years. The goal is to find the number that gives you a comfortable home without compromising your broader financial life.
The 28/36 Rule Explained
The 28/36 rule is the traditional guideline for housing affordability. It says: your monthly housing costs should not exceed 28% of your gross monthly income, and your total debt payments (housing plus all other debts) should not exceed 36% of your gross monthly income.
If your household earns $120,000/year, your gross monthly income is $10,000. The 28% rule allows up to $2,800/month in housing costs. The 36% rule limits total debt payments to $3,600/month. If you have $600/month in student loans and a $400/month car payment ($1,000 total), your maximum housing payment drops to $2,600/month to stay within the 36% total debt limit.
Note that the 28% applies to gross income, not take-home pay. After taxes, retirement contributions, health insurance, and other deductions, your actual take-home may be only 60–70% of gross income. A $2,800 housing payment on a $10,000 gross income may feel tight if take-home is $7,000/month and you want to save aggressively for retirement.
Understanding PITI: Your True Monthly Housing Cost
When lenders and financial advisors talk about your monthly housing payment, they mean PITI, not just principal and interest. PITI stands for:
- Principal: the portion of your payment that reduces your loan balance
- Interest: the cost of borrowing, which comprises most of your early payments
- Taxes: property taxes, typically escrowed and paid monthly as 1/12 of the annual bill
- Insurance: homeowner's insurance, also typically escrowed
For a $400,000 home with 20% down at 7% interest: the principal and interest payment is approximately $2,129/month. Property taxes in a typical area might add $400/month. Homeowner's insurance adds another $150/month. Total PITI: approximately $2,679/month. This is the number to use in your 28/36 calculation, not the principal-and-interest figure alone.
Use our mortgage calculator to compute PITI for different home prices, down payments, and interest rates to find the right range for your budget.
The DTI Ratio: How Lenders Measure Affordability
Lenders use the Debt-to-Income (DTI) ratio as their primary affordability measure. Your DTI is simply your total monthly debt payments divided by your gross monthly income, expressed as a percentage.
Most conventional mortgages require a DTI of 43% or less (some allow up to 50% with compensating factors like excellent credit or significant reserves). FHA loans typically allow up to 43%, and some specialty programs go higher. A lower DTI not only helps you qualify—it also generally earns you a better interest rate.
Lenders calculate two DTI ratios: the front-end DTI (housing costs only / gross income) and the back-end DTI (all monthly debts / gross income). They're interested in both. Paying off a car loan or student loan before applying for a mortgage can significantly improve your back-end DTI and either qualify you for a larger loan or a lower rate.
Down Payment Impact on PMI
Private Mortgage Insurance (PMI) is required on conventional loans when your down payment is less than 20%. PMI typically costs 0.5–1.5% of the loan amount annually, added to your monthly payment. On a $400,000 loan, PMI at 1% adds $4,000/year or $333/month to your housing costs.
PMI ends automatically when your loan balance reaches 80% of the original home value, either through payments or appreciation. You can request cancellation at 80% LTV; it's legally required to be removed at 78% LTV.
The financial question is whether to make a smaller down payment (keeping cash liquid) or a larger one (avoiding PMI). There's no universal answer. If you're putting only 5% down on a $400,000 home, you're borrowing $380,000 at PMI of approximately $300/month. That PMI represents 0.9% annually on your loan—similar to a 0.9% higher interest rate. If you can earn more than 0.9% on the cash you'd otherwise put into a down payment (likely, with index fund investing), keeping the cash and paying PMI may be mathematically favorable.
The Hidden Costs of Homeownership
First-time buyers routinely underestimate homeownership's total cost. Here are the expenses beyond PITI that your housing budget must accommodate:
- Maintenance and repairs: the standard rule is to budget 1–2% of home value annually. On a $400,000 home, that's $4,000–$8,000/year. In reality, costs are lumpy—years pass with minimal expense, then a roof ($10,000–$20,000) or HVAC ($5,000–$15,000) hits.
- HOA fees: if applicable, these range from $50 to $1,500+/month depending on community. Factor these into your PITI calculation.
- Property taxes: these increase over time. In many states, assessments can jump substantially when a home sells, and annual rate changes add further uncertainty.
- Closing costs: typically 2–5% of the purchase price, paid upfront. On a $400,000 home, that's $8,000–$20,000 that must come from savings in addition to the down payment.
- Utilities: homes typically cost more to heat, cool, and power than apartments, especially larger homes.
- Furnishing and moving: a new homeowner commonly spends $5,000–$20,000 in the first year on furniture, appliances, and setup.
Renting vs. Buying: The True Comparison
Buying is not always financially superior to renting. The rent-vs-buy comparison must account for: the opportunity cost of the down payment (invested in the market instead), transaction costs (6% agent commissions plus closing costs make short holding periods expensive), the non-equity portions of mortgage payments (interest, taxes, insurance, PMI, maintenance), and local price-to-rent ratios.
A useful heuristic is the price-to-rent ratio: divide the home price by the annual rent for a comparable property. A ratio below 15 generally favors buying; above 20 may favor renting in the short-to-medium term; above 25 strongly favors renting unless you plan to stay for many years. In high-cost markets, price-to-rent ratios of 30–40 are common, which means renting may be cheaper on a monthly basis even before accounting for opportunity cost and transaction costs.
The cleanest answer to "how much house can you afford" combines the 28/36 rule with a realistic accounting of all costs and a clear understanding of your local market. A house affordability calculator can help you work through these numbers systematically, accounting for your income, debts, down payment, and estimated taxes and insurance for your target area.
The right home is one where the mortgage, taxes, insurance, and maintenance leave you with enough cash flow to continue saving for retirement, building an emergency fund, and living the life you want. Stretching for a home that leaves you "house poor" is one of the most common—and painful—financial mistakes.