Start with your monthly take-home pay, not your gross income
The first step is knowing how much money actually lands in your account each month after taxes, health insurance, and retirement contributions come out. This is your take-home pay or net income. Lenders care about this number because it is what you have available to pay a mortgage alongside everything else.
Pull your last two or three pay stubs and add up what you receive. If your income varies — you work commission, seasonal work, or are self-employed — use an average of the last two years. If you have recently changed jobs, lenders will typically use your current income, but some will average the last two years if it is higher.
Key Takeaways
- Most lenders use the 28/36 rule: your mortgage payment should not exceed 28 percent of your gross monthly income, and all debt payments combined should not exceed 36 percent.
- Your actual affordable payment depends on your other debts — car loans, student loans, credit cards — because lenders count all of them together.
- A mortgage payment includes principal, interest, property taxes, homeowners insurance, and possibly mortgage insurance, so the advertised interest rate alone does not tell you the full monthly cost.
- Down payment size, loan term, and current interest rates all change what you can afford, and you should test different scenarios before talking to a lender.
- What a lender says you can borrow and what you can actually afford to pay without financial stress are often two different numbers.
Understand the 28/36 rule that lenders use
Most mortgage lenders follow a straightforward guideline called the 28/36 rule. It says your housing payment should not be more than 28 percent of your gross monthly income — that is your income before taxes. Your total debt payments, including the mortgage, should not exceed 36 percent of gross income.
Here is what this means in practice. If your gross monthly income is $5,000, lenders will typically allow a housing payment up to $1,400 (28 percent). But if you also have a car payment of $350 and student loan payments of $200, your total debt is $1,950 — which is 39 percent of gross income. That exceeds the 36 percent threshold, so the lender may reduce the mortgage amount they offer you, or you may not meet their requirements at all.
These are guidelines, not hard rules. Some lenders are stricter; some are more flexible if you have a large down payment or excellent credit. But they give you a realistic starting point for what to expect.
List all your monthly debt payments
Before you calculate what mortgage payment you can afford, write down every monthly debt payment you currently make. This includes car loans, student loans, personal loans, credit card minimum payments, child support, alimony, and any other regular payment obligation.
Add these up. This total matters because lenders subtract it from the amount they will lend you. If you have $550 in other debt payments and your 36 percent threshold allows $2,000 in total debt, you have only $1,450 left for a mortgage payment.
If you are planning to pay off a debt before you close on the house, you can exclude it from this calculation — but be prepared to prove you will actually pay it off. Lenders will verify this before final approval.
Know what is included in your actual monthly payment
The mortgage payment you see advertised — say, $1,200 a month — is usually just the principal and interest. Your real monthly cost includes more. The acronym PITI covers the main pieces: Principal and Interest, Property taxes, and Insurance.
Property taxes vary widely by location and are paid to your city or county. Homeowners insurance protects the building and your belongings. Both are often rolled into your mortgage payment and held in an escrow account — a separate account your lender manages on your behalf.
If your down payment is less than 20 percent of the home price, you will also pay mortgage insurance (called PMI, or private mortgage insurance). This protects the lender if you stop paying, and it adds $100 to $300 or more to your monthly payment depending on the loan size and your down payment.
When you calculate what you can afford, use the full PITI number plus mortgage insurance if it applies. A mortgage calculator that includes these costs will give you a much more accurate picture than one showing only principal and interest.
Test different down payment and loan term scenarios
Your down payment size and the length of your loan both change what you can afford. A larger down payment means a smaller loan, a lower monthly payment, and no mortgage insurance. A longer loan term — 30 years instead of 15 — spreads payments over more time, lowering the monthly amount but costing more in interest overall.
If you have saved $40,000 and are looking at a $300,000 home, that is a 13 percent down payment. If you can save another $20,000, you reach 20 percent and eliminate mortgage insurance entirely. That difference might be $150 to $200 per month.
Use a mortgage calculator to run several scenarios: 10 percent down with a 30-year loan, 15 percent down with a 30-year loan, 20 percent down with a 30-year loan, and 20 percent down with a 15-year loan. Write down the monthly payment for each. This shows you the real trade-offs and helps you decide what makes sense for your situation.
Separate what lenders say you can borrow from what you can afford
A lender may tell you that you can borrow $400,000 based on your income and credit. That does not mean a $400,000 mortgage is comfortable for you. Lenders are willing to take more risk than you should.
After you calculate the maximum payment using the 28/36 rule, ask yourself: Can I pay this every month and still cover groceries, utilities, car maintenance, medical expenses, and unexpected costs? Can I save for retirement? Can I handle a job loss or medical emergency without defaulting?
Many people find that a payment 10 to 15 percent lower than the lender's maximum feels sustainable. Others are comfortable at the maximum. The right number depends on your job stability, your emergency savings, and your personal comfort with debt.
Account for property taxes and insurance in your area
Property tax rates and homeowners insurance costs vary dramatically by location. A home in one county might have a $200 monthly property tax bill; the same home across the county line might be $400. Insurance costs depend on the home's age, location, and your credit score.
Before you settle on a target mortgage payment, research the property tax rate in the area where you want to buy. Your county assessor's office publishes this information online. For insurance, get quotes from at least two insurers for a home similar to what you are considering.
Add these estimated costs to your principal and interest calculation. If the total is higher than you expected, you may need to lower your target home price or increase your down payment to keep the payment affordable.
Frequently Asked Questions
What if I have no other debt — can I borrow more?
Yes. If you have no car payments, student loans, or credit card debt, the full 36 percent of your gross income can go toward housing. This means your mortgage payment can be up to 36 percent instead of 28 percent. However, the 28 percent guideline still often applies as a practical limit, depending on the lender.
Does my credit score affect how much I can afford?
Your credit score affects the interest rate you receive, which changes your monthly payment. A higher score gets a lower rate, reducing your payment. A lower score increases your rate and payment. This can shift what you can afford by several hundred dollars per month, so improving your credit before you shop for a mortgage can make a real difference.
Should I use my gross income or take-home pay for the 28/36 rule?
The 28/36 rule uses gross income — the amount before taxes. This is what lenders use because they can verify it on tax returns and pay stubs. However, when you personally decide what you can afford, think in terms of take-home pay, because that is what you actually have to spend.
What if my income is irregular or I am self-employed?
Lenders typically average your income over the last two years using tax returns. If your income is growing, they may use the most recent year. If it is declining, they use the average. Have your last two years of tax returns ready when you talk to a lender, and be honest about whether your income is stable or changing.
Can I afford a mortgage if I am still paying off student loans?
Yes, but your student loan payments count toward your 36 percent debt limit. If you owe $300 per month in student loans, that reduces the mortgage payment the lender will offer you. Paying down student loans before you buy can increase your borrowing power, but only if you have time and the money to do so.