The 28/36 Rule Explained
Most lenders use a version of the 28/36 rule as a starting guideline: housing costs (mortgage principal, interest, taxes, and insurance) shouldn't exceed 28% of gross monthly income, and total debt payments (housing plus car loans, student loans, credit cards) shouldn't exceed 36%. Some loan programs allow higher ratios, particularly for borrowers with strong credit or larger down payments, but 28/36 remains the most commonly cited benchmark.
Why Existing Debt Matters So Much
A borrower with significant car payments or student loans qualifies for a meaningfully smaller mortgage than someone with the identical income but no other debt, since the 36% ceiling applies to total debt, not just housing. This is why paying down other debt before a home search can sometimes increase buying power more than saving for a larger down payment.
What's Included in a Monthly Housing Payment
Often abbreviated PITI — Principal, Interest, Taxes, Insurance — the full monthly housing cost is more than just the loan payment. Property taxes and homeowners insurance vary significantly by location, and many affordability estimates that only account for principal and interest can overstate what a buyer can actually afford once taxes and insurance are added in.
Down Payment's Effect on Affordability
A larger down payment reduces the loan amount needed, which lowers the monthly payment and can allow a buyer to afford a higher-priced home within the same monthly budget. Down payments below 20% often also require private mortgage insurance (PMI), an added monthly cost that affordability estimates should account for but that isn't included in this simplified calculation.