How Much House Can I Afford? Why the 28/36 Rule Doesn't Tell the Full Story

Ask ChatGPT how much house you can afford, and it’ll probably tell you about the 28/36 rule.

This rule includes two parts: first, it compares the new payment on the house you want to buy to your gross monthly income. Then it compares your total monthly debt costs to your gross monthly income.

If the new house payment is 28 percent or less of your income, and if your total debt is 36 percent or less of your income, you can afford the home.

Or so the rule says.

As a loan officer who works with a lot of first-time homebuyers, I don’t rely on these kinds of rules. In real life, there’s no one-size-fits-all formula to answer whether you can afford a house. Everybody’s budget is different.

Is the 28/36 Rule Good for Homebuyers?

Buyers shouldn’t take rules like 28/36 too literally, but such rules can help new homebuyers. Specifically, 28/36 can get you thinking about your monthly budget, which is the first step toward finding your true home price range.

Many clients I work with don’t know how much money they spend each month until we look closely at their spending habits. They don’t know because our digital age has crippled our sense of expenditure. When we can wave our phones to pay for something and never have to count out cash or get change, we don’t get any physical feedback.

So, as we look over their monthly bank statements, a lot of new homebuyers feel surprised by how many streaming services they have, or how much they spend on Amazon purchases or getting DoorDash. One client, I remember, was floored that she spent over $300 a month at Starbucks. She decided right then to cut back.

These kinds of expenses affect how much money you’ll have left to spend on housing, no matter what the 28/36 rule says.

Does the 28/36 Rule Affect Mortgage Approval?

While 28/36 doesn’t fit every homebuyer, it’s tied directly to their debt-to-income ratio, or DTI. DTI definitely affects mortgage eligibility:

• Front-End DTI: This figure measures your new house payment as a percentage of your monthly income. In the case of 28/36, this number is 28 percent.

• Back-End DTI: This figure measures all your monthly debt, including your mortgage payment, as a percentage of your monthly income. For 28/36, this number is 36 percent.

DTI matters a lot. But DTIs of 28 and 36 aren’t the official guidelines for mortgage approval. DTI limits vary by borrower, lender, loan type, and loan.

Generally, 28/36 isn’t feasible for most first-time homebuyers. Most first-time buyers I work with are closer to 38/46 than 28/36. I closed a loan recently that was 40/43.

28/36 Can Limit Homebuyers

Some people read about the 28/36 rule, do the basic math, and realize they’ll never find a decent home in their area that fits 28/36. If they take this rule literally, that’s the end of their homebuying journey, at least for now.

Or they decide to buy a home that fits into the 28/36 and miss out on an opportunity to own a better property. I’ve known homebuyers who want to stick to 28/36 and opt for a manufactured home that fits this budget.

Manufactured homes can be good, but they don’t tend to appreciate like stick-built homes, so they aren’t always the best investments. Spending a little more than 28 percent of their income on a house payment to get a traditional home could position some buyers to own a more valuable asset years later.

Income, Debt, and Credit – The Borrowing Power Triangle

I don’t mean to pick on 28/36. I’d say the same about any combination of numbers because no set of DTI rules can apply across the board to all homebuyers. Mortgages are one of the most complex and highly regulated financial products you can find. They’re too complicated to boil down to a general rule of thumb.

Why? Because a lot of nuance shapes those two numbers.

Income Needed for Mortgage Approval

With income, for example, the type of income matters more than many people think. To be counted for a mortgage, the income should be expected to continue for a few years into the future. This means income earned from overtime or bonuses can’t always be counted. The same goes for money from second jobs, since most people can’t work two jobs indefinitely.

To be considered for a mortgage, income has to be documented. For buyers who earn an hourly wage, this is usually simple enough. They upload W2 forms or recent pay stubs.

For someone who’s self-employed or a gig worker, documenting income means sharing tax forms or bank accounts. Self-employed borrowers who write off business expenses on their annual tax returns wind up documenting less income than they actually earned, and lenders have to use the lower, documented figure.

I usually advise these clients to delay their expensive write-offs until the year after they buy a house, if possible.

How much income a borrower earns makes a big difference, too, because 28 percent means different things to people at different income levels. Someone who earns $12,000 a month, for instance, would still have $8,640 a month to spend after making a house payment that’s 28 percent of their income.

That’s a lot more leeway than someone who earns $5,000. That person would have only $3,600 to spend on everything else after making a house payment that’s 28 percent of their monthly income.

Debt, in Addition to the Mortgage Payment

Back-end DTI, the second number in the 28/36 rule, measures all the borrower’s debt payments as a percentage of their gross monthly income. This includes the new mortgage payment, along with ongoing expenses like car payments, student loan payments, and credit card minimum payments.

Debt can also include other payments like the buy-now-pay-later payment services people use to shop online. Even if there are just four payments, this has to be projected over the life of a 30-year loan, because these are considered revolving accounts.

Some borrowers don’t know that their debt includes loans they’ve co-signed for a family member or friend. Even if the homebuyer never has to make a single payment on those loans, they’re still responsible for them.

Obviously, having less debt puts people in a better position to make a bigger mortgage payment, but 36 percent DTI is not the maximum for most homebuyers. It’s common for borrowers to push back-end DTI into the 40s. Or even higher in some cases.

Credit Score and Loan Type Create Even More Context

The borrower’s credit score and loan type shape the size of their monthly payment. These two factors affect the loan’s interest rate, which in turn affects the size of the monthly payment needed for the same loan balance.

For example, let’s say you earn $10,000 a month in gross income. That’s the income before taxes, insurance, and other deductions come out. We’ll say you’re aiming for a payment of $2,800, which would fall within the 28/36 rule.

What loan size can you get and still keep this payment at $2,800?

At 6.5 percent, that answer might be a loan of about $350,000. Meanwhile, a borrower who qualified for a rate of 5.5 percent, instead of 6.5 percent, could borrow about $385,000 and still keep the same $2,800 payment.

Which begs the question: How do you get a lower rate? The borrower’s credit score is a big factor here. Higher credit scores open more doors. At my company, we help coach people on how to improve their rate before borrowing.

But it’s also important for borrowers to use the right loan type. For first-timers, FHA loans have a lot to offer here: more competitive rates despite lower average credit scores and lower down payments.

Translating Monthly Budget to Home Price

Sometimes, when I ask new clients how much money they can spend on a mortgage each month, they may say $1,700 or $1,900. Then they show me the home they want to buy, a house that costs $500,000.

Of course, those two numbers don’t translate. This opens the door to two reality checks:

• Reality check 1: Buying a $500,000 house often means paying $3,500 or $4,000 a month unless you’re putting 50 percent or more down.

• Reality check 2: The payment you can afford must also leave room for property taxes, homeowners insurance, and any HOA fees that may be required. That cuts into how much you can afford to borrow.

For example, property taxes may add $175 a month. Homeowners insurance may add another $125 per month. HOA fees may be $200. That’s $500 even before paying on the principal and interest on a loan.

The good news: Buying a place with no HOA fees, lower property taxes, and shopping around for cheaper insurance might cut this $500 extra down to $300 or so. This creates a little more room to borrow for a nicer house, and it’s something the borrower can control.

The Reality Checks Work Both Ways

Once people see what kind of house they can get within their comfortable monthly payment, they often start re-thinking that comfort zone. Could I afford to pay a little more?

This always reminds me of that team-building game people play in meetings. The one where the leader tells the group to put a Post-it Note as high as they can possibly stick it on the wall. Then the leader asks the group to go back and put the note a little higher. Almost always, everybody can reach a little higher than they thought.

This tends to be true with monthly payments on mortgage loans, too. People realize they can go $50, or maybe $150, higher than they thought.

Again, it goes back to priorities. Are you willing to cancel a couple of streaming services or cut back on your Starbucks habit and put that money toward the house payment?

Ongoing Costs and Unexpected Risks to Consider

All that being said, no one should borrow more than they can pay back, even if the lender will approve it.

Sometimes, I have clients who consider stretching their monthly payment comfort zone a little too far. This can be tempting because it might allow a nicer house or an HOA with a pool. Plus, a more expensive home can put you in control of a more valuable asset, one that should be worth even more in the future.

But when I check back with these clients six months after closing, almost all of them are glad they didn’t push themselves for a more expensive property. Inevitably, the AC will break, or they’ll have to get a new car. They’re glad they didn’t have to balance all that with a larger mortgage payment.

Plus, borrowers should know that their monthly mortgage payment may increase, even on a fixed-rate loan. The principal and interest won’t change, but the property taxes, insurance, and HOA fees can vary. Property taxes often rise as the home appreciates in value.

Homeowners insurance premiums also tend to go up as time passes, though homeowners have more control since they can shop around for a cheaper rate.

Pre-Approval vs True Affordability

Most lenders will pre-approve borrowers for a bigger payment than the borrower can afford. They do this by maxing out the pre-approval. The idea is to have more borrowing power just in case loan details change.

But a maxed-out pre-approval considers only the numbers. It shows what a borrower should be able to afford, not what the actual human borrower in question can afford.

I don’t do this. Instead, I have a talk with each client, especially first-time buyers, about their personal finances to find out, from them, how much they can afford to pay each month.

A maxed-out pre-approval is based on existing debt, existing income, and credit score. True affordability also considers the baby that’s on the way, which might cut into work hours. It considers the car that couldn’t possibly last another three years. True affordability reflects the borrower’s real life in a way that a lender’s algorithm can’t always capture.

Real Buyer Wins & Regrets

Buying at a payment you can afford can pay off in big ways later. I had a client two years ago who got a major promotion and was, all of a sudden, earning significantly more money. This promotion required moving and buying a new house.

Since he had bought the first house at a payment that was comfortably within his price range, he could afford to buy a second home without selling the first. Anybody who’s ever had to time a home sale with a home purchase knows this is a big deal. He wasn’t desperate to sell the existing property.

As for regrets, the main one I hear about is the inability to refinance. Some clients call when rates drop, thinking they can refinance and take advantage of the lower rate.

But because they were stretched so thin by the mortgage payment, they haven’t been able to pay extra toward their principal (or save money to put toward their new loan at closing). As a result, they don’t have enough equity to refinance and take advantage of the lower rates.

Somebody who had bought a cheaper home may have been able to save more or pay down their principal balance, making a refinance easier to get.

At the End of the Day: Always Ask an Expert

You can do a lot online, from chatting with an AI bot about the 28/36 rule to getting pre-approved for a mortgage. But eventually, it’s best to do the old-fashioned thing and talk to an expert in person or on the phone.

Talking to an expert who looks out for you will cut through the marketing ploys and buzzwords. You’ll learn how all the nuances of mortgage borrowing work for your life and your budget.

I’ve talked with repeat homebuyers who say, “I wish I had known about this when I bought my first house.”

When you work with an expert, you can learn all of this the first time around.