How much house can I afford? The 28/36 rule, explained with real numbers

Step 1: find your housing budget

Multiply gross monthly income by 0.28. Then subtract your other monthly debts from gross income times 0.36. Use the smaller of the two as your maximum housing payment.

Example: household income $108,000 a year ($9,000 a month) with a $400 car payment and $200 in student loans.

• 28% test: $9,000 x 0.28 = $2,520
• 36% test: $9,000 x 0.36 = $3,240, minus $600 in debts = $2,640
• Housing budget: $2,520 (the smaller number)

Step 2: subtract taxes, insurance, and HOA

Suppose property tax, homeowners insurance, and mortgage insurance total about $600 a month. That leaves about $1,920 for principal and interest.

Step 3: turn the payment into a loan amount

At 7.0% on a 30-year loan, each $100,000 borrowed costs about $665 a month. $1,920 / $665 x $100,000 is roughly a $289,000 loan. With 5% down, that points to a home price around $300,000 to $305,000.

What changes the answer

• Rate: at 6.0%, $100,000 costs about $600 a month, raising the loan to about $320,000.
• Down payment: more down means a higher price for the same payment, and less or no mortgage insurance.
• Location: property taxes and insurance vary widely and can change the answer by tens of thousands of dollars.

Plug your own numbers into the payment calculator.

Beyond the formula

Ask yourself what else you are saving for, how stable your income is, and whether you can handle a repair bill in year one. The best budget is one you would still be comfortable with if something unexpected happened.