How Much House Can You Afford
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The 28/36 rule
How much house you can afford isn’t the number a lender will approve you for — it’s the number that leaves your budget alive after closing. Lenders approve you based on gross income and debt ratios; they don’t see childcare, 401k contributions, or the fact that you’d like to eat out occasionally. This guide walks through the 28/36 rule, why maxing your approval is usually a mistake, and how to pressure-test a specific listing against a real take-home budget.
From monthly payment to purchase price
Example: $120,000/year gross = $10,000/month. 28% → $2,800 max PITI. 36% → $3,600 total debt. If you already pay $500 on a car loan and $200 on student loans, your real housing ceiling is $3,600 − $700 = $2,900. Housing ceiling wins over 28% when the back-end ratio is tighter.
Why lender pre-approval is higher than this
Given a target PITI, work backwards. At 6.5% for 30 years, a $2,800 PITI target breaks down like this: back out taxes ($400/mo at 1.2% effective rate on a $400k home = $400) and insurance ($125/mo). Remaining P&I budget: $2,800 − $400 − $125 = $2,275.
The stress tests to actually run
Lenders often approve at 43% DTI (“qualified mortgage” limit) or higher. On $120k gross, that’s $4,300/mo of total debt — a PITI approaching $3,800 after existing debts. Taking that approval buys you a bigger house and a life with zero financial margin. You’ll be house-rich, cash-poor, and one layoff from panic. The rule of thumb exists because the regression of foreclosure rates against DTI gets ugly past 28/36.
The 28% trap in high-cost markets
Before falling in love with a listing, stress-test against three scenarios:
Down payment, PMI, and the 20% shortcut
In San Francisco, Manhattan, Boston, or Seattle, strict 28% is often impossible for first-time buyers — median house price / median income ratios exceed 10 in some markets. If you have to break 28%, at least: (a) have 6+ months of emergency fund liquid, (b) carry no other consumer debt, and (c) plan to stay 5+ years so you don’t eat transaction costs on forced sale.
Closing costs — the budget hit most first-timers miss
20% down avoids PMI (private mortgage insurance, 0.3–1.5% of loan per year). On a $360k mortgage at 0.8% PMI, that’s $2,880/year or $240/mo — dropped entirely at 20% down. Many buyers skip the 20% target to get into a house sooner; that’s fine, but understand PMI adds to your real PITI. Remove it at 20% LTV by refinancing or requesting removal (by law, it auto-drops at 22% LTV).