The 28/36 rule — the starting point
The most widely used affordability guideline is the 28/36 rule:
- 28% rule: Your total monthly housing payment — principal, interest, taxes, and insurance (PITI) — should not exceed 28% of your gross monthly income.
- 36% rule: Your total debt payments, including housing, car loans, student loans, and credit cards, should not exceed 36% of gross monthly income.
These are guidelines, not hard rules. FHA loans allow DTI up to 43% and sometimes higher. But staying within 28/36 gives you a comfortable buffer against financial stress.
How much house can you afford by salary?
| Annual salary | Max monthly payment (28%) | Estimated home price |
|---|---|---|
| $50,000 | $1,167 | ~$180,000 |
| $75,000 | $1,750 | ~$270,000 |
| $100,000 | $2,333 | ~$360,000 |
| $125,000 | $2,917 | ~$450,000 |
| $150,000 | $3,500 | ~$540,000 |
| $200,000 | $4,667 | ~$720,000 |
Estimates assume 6.8% interest rate, 30-year term, 5% down, $150/mo insurance, and average property tax. Use our calculator for a precise figure.
The real calculation — step by step
Step 1 — Find your gross monthly income
Take your annual salary and divide by 12. If you earn $80,000/year, your gross monthly income is $6,667. Include all income sources — salary, freelance, rental income — that you can document.
Step 2 — Apply the 28% front-end limit
Multiply your gross monthly income by 0.28. At $6,667/month, your maximum housing payment is $1,867. This covers principal, interest, property tax, and insurance (PITI).
Step 3 — Subtract taxes and insurance
Property tax and insurance are part of your monthly payment but don't go toward your loan. A rough estimate: subtract $250–$500/month for taxes and insurance combined. That leaves $1,367–$1,617 for principal and interest.
Step 4 — Back-calculate the home price
At 6.8% for 30 years, every $100,000 of loan costs roughly $652/month in principal and interest. So $1,500/month in P&I supports roughly a $230,000 loan. Add your down payment to get the home price.
What actually limits your budget
The 28% rule gives you a ceiling, but several factors can lower your real-world limit:
- Existing debt: Student loans, car payments, and credit card minimums all count against your 36% total DTI limit. $500/month in existing payments effectively reduces your max mortgage payment by $500.
- Down payment size: A larger down payment means a smaller loan, lower monthly payment, and potentially no PMI. A smaller down payment stretches your budget but adds MIP or PMI costs.
- Property taxes: Rates vary enormously by state. New Jersey averages 2.47% annually — on a $400,000 home that's $820/month in property tax alone.
- HOA fees: In condos or planned communities, HOA fees of $200–$600/month can significantly reduce your purchase power.
- Interest rates: A 1% increase in rates reduces your buying power by roughly 10%. At 6% you might afford a $350,000 home; at 7% that drops to around $315,000.
The hidden costs most buyers forget
Your mortgage payment is not your total cost of homeownership. Budget for:
- Closing costs: Typically 2–5% of the loan amount ($7,000–$17,500 on a $350,000 loan)
- Moving costs: $1,000–$5,000 depending on distance
- Immediate repairs: Even new homes may need work
- Ongoing maintenance: Budget 1% of home value per year ($3,500/yr on a $350,000 home)
- Utilities: Larger homes cost more to heat, cool, and maintain
How much should you have saved before buying?
Beyond the down payment, you should ideally have:
- 3–6 months of mortgage payments in emergency savings
- Closing costs in cash (2–5% of loan amount)
- $5,000–$10,000 for immediate post-purchase expenses
So if you're buying a $350,000 home with 3.5% down ($12,250), your total cash needed is closer to $30,000–$40,000 when you include closing costs and reserves.
A practical example
Let's say you earn $95,000/year and have $400/month in existing debt payments (car loan + student loan minimum).
- Gross monthly income: $7,917
- 28% front-end limit: $2,217/month for housing
- 36% back-end limit: $2,850 total debt — minus $400 existing = $2,450 max housing
- The binding constraint is the front-end: $2,217/month
- Subtract $300 taxes + $150 insurance = $1,767 for P&I
- At 6.8% / 30yr, $1,767 P&I supports roughly a $271,000 loan
- With 5% down: home price around $285,000
Use our mortgage calculator to run your own numbers with your actual state's tax rate and current interest rates.