The 28/36 rule
Most US lenders start from two ratios of your gross monthly income:
- Front-end ratio: the full housing payment (principal, interest, property tax, insurance, PMI, HOA) should be no more than 28% of income.
- Back-end ratio: housing plus every other debt payment should be no more than 36%.
The lower of the two limits sets your maximum payment. Many loan programs go further: conventional loans can reach 45% to 50% back-end with strong credit and reserves, FHA loans often 43% or more. The "Stretch" setting uses 36/43. Being approved for a payment is not the same as being comfortable with it.
A comfortable budget
The "Comfortable" setting caps housing at 25% of gross income and all debts at 33%. That leaves room for maintenance (budget 1% to 2% of the home's value a year), retirement saving and the surprises every owner meets. If you want to keep saving 15% of income for retirement while buying, this is closer to what works.
A worked example
A household earning $110,000 a year has $9,167 a month gross. 28% of that is $2,567 for housing. With $450 of other debt payments, 36% allows $3,300 minus $450 = $2,850, so the 28% limit is the tighter one. At 7% over 30 years, after 1.1% property tax and 0.45% insurance, $2,567 a month supports a home of about $358,000: $60,000 down and a loan of roughly $298,000, with PMI while the down payment is under 20%.
How rates change what you can afford
Each percentage point on the mortgage rate moves the affordable price by roughly 7% to 10%. At 7% the household above can buy about $358,000; at 6% the same payment buys about $383,000. That is why buyers watch the weekly rate survey, and why the rate chart above matters as much as your income.
Other costs of buying
Closing costs usually run 2% to 5% of the price: lender fees, title insurance, appraisal, prepaid taxes and insurance. Keep them separate from the down payment figure you enter. Also plan for moving, furniture and a cash reserve of at least three months of payments, which many lenders want to see anyway.