The 28/36 Rule
Nearly every mortgage in the United States is underwritten against two ratios, and the tighter of the two decides your budget:
- Front-end ratio — the housing payment alone, capped near 28% of gross monthly income. Housing here means principal, interest, property tax, homeowners insurance, HOA dues and PMI, not just the mortgage.
- Back-end ratio — the housing payment plus every other monthly debt, capped at 36% conventionally, 43% for a qualified mortgage, and up to 50% on FHA loans with compensating factors.
A borrower with no car payment and no student loan is usually limited by the 28% test. Add $550 of monthly debt and the back-end test almost always binds instead — which is why paying off a car loan can raise a home budget more than a raise does.
What Counts as Debt
Underwriters count the minimum required payment on revolving accounts, not the balance and not what you actually pay. A $9,000 credit card balance with a $180 minimum counts as $180. Items that count:
- Car loans and leases, including the last few payments
- Student loans — on income-driven plans, most programs count the documented payment; some count 0.5% of the balance if the payment is $0
- Credit card and personal loan minimums
- Court-ordered alimony and child support
- Co-signed loans, even when someone else pays them
Items that do not count: utilities, phone bills, insurance premiums other than the home's, groceries, childcare, and 401(k) loan repayments.
Income Is Gross, Not Take-Home
Every ratio uses income before tax. On a $95,000 salary the calculation starts from $7,917 a month even though roughly $6,000 lands in the account. This is a large part of why the 28/36 limits feel generous on paper and tight in practice: a payment at 28% of gross is closer to 37% of net.
Self-employed income is averaged over two years of tax returns, and it is net business income after deductions. Aggressive write-offs reduce the income a lender will recognise, sometimes by a third.
How Far a Down Payment Goes
A larger deposit raises the affordable price in two ways: it removes PMI above 20%, and it lowers the loan for a given payment. But the effect is smaller than most buyers expect. On a fixed monthly budget, every extra dollar of down payment buys roughly one extra dollar of price plus the PMI saving — it does not multiply.
What moves the number far more is the interest rate. At a $2,200 monthly budget, a rate falling from 7.5% to 6.0% raises the supportable loan by about 15%, which is the equivalent of an extra $45,000 in cash on a $300,000 loan.
Affordable Is Not the Same as Sensible
The ratios describe what a lender will approve, which is the maximum risk they will underwrite — not the payment that leaves room for retirement contributions, a replacement car, or a lost job. Many financial planners suggest a housing payment closer to 25% of net income, which typically lands 20–30% below the lender's ceiling.
Frequently Asked Questions
How much house can I afford on $100,000 a year?
With modest debts, a 20% down payment and a 6.7% rate, roughly $350,000–$400,000. The range is wide because property tax rates vary from about 0.3% in Hawaii to over 2% in New Jersey, which alone can shift the answer by $50,000.
Does a higher credit score raise my budget?
Indirectly and substantially. It does not change the DTI limits, but it lowers the rate, and the rate drives the payment. The spread between excellent and fair credit is often more than a full percentage point.
Should I use gross or net income in the calculator?
Gross — income before tax and deductions. Entering net income will understate the budget by roughly a quarter.