Start with your gross monthly income
The most common starting point is the 28/36 rule, which lenders use to decide how much they will lend you. The rule says your housing payment should not exceed 28 percent of your gross monthly income — that is, your income before taxes and other deductions come out.
To find your number, multiply your gross monthly income by 0.28. If you earn $4,000 per month before taxes, 28 percent is $1,120. That is the monthly housing payment amount most lenders will consider reasonable for you.
This rule includes your mortgage payment, property taxes, homeowners insurance, and mortgage insurance if you are putting down less than 20 percent. It does not include utilities, maintenance, or repairs — those are separate costs you will pay on top.
Key Takeaways
- The 28/36 rule suggests your housing payment should not exceed 28 percent of your gross monthly income, though some lenders will go higher if your other debts are low.
- Your total debt payments — including the mortgage, car loans, credit cards, and student loans — should not exceed 36 percent of your gross monthly income.
- A mortgage calculator can show you what monthly payment matches a specific loan amount, but knowing what you can afford and what a lender will offer are two different things.
- Your down payment, interest rate, and loan length all change your monthly payment, so comparing different scenarios before you talk to a lender helps you understand your options.
- Lenders may approve you for more than the 28/36 rule suggests, but that does not mean you should borrow that much.
Check your total debt load with the 36 percent rule
The second part of the 28/36 rule looks at all your debt together. Your total monthly debt payments — mortgage, car loans, credit cards, student loans, and any other regular payments — should not exceed 36 percent of your gross monthly income.
If you earn $4,000 per month, 36 percent is $1,440. If you already have a car payment of $350 and student loan payments of $200, that leaves $890 for your housing payment. Even though the 28 percent rule might allow $1,120, your other debts bring your realistic housing budget down.
This matters because lenders look at both numbers. You might pass the 28 percent test but fail the 36 percent test, which means they will not lend you as much as the first rule alone would suggest.
Use a mortgage calculator to see the payment for a specific loan amount
Once you know your budget range, a mortgage calculator shows you what your actual monthly payment would be. You enter the loan amount, the interest rate, and the number of years you are borrowing for, and the calculator tells you the monthly payment.
The monthly payment depends on three things: how much you borrow, what interest rate you get, and how long the loan lasts. A $300,000 loan at 6 percent over 30 years costs roughly $1,799 per month. The same $300,000 at 7 percent costs roughly $1,996 per month. A shorter loan — say, 15 years instead of 30 — costs much more per month but you pay far less interest overall.
Calculators are free and available from most banks, mortgage companies, and financial websites. They help you understand how changing one number affects your payment, so you can see what trade-offs make sense for your situation.
Remember that lenders may approve you for more than you should borrow
A lender's approval is not the same as your actual budget. Lenders are in the business of lending money, and they may approve you for more than the 28/36 rule suggests, especially if you have good credit or a large down payment.
Some lenders will go as high as 43 percent of your gross income for housing, or even higher in certain cases. That does not mean you can comfortably afford it. The 28/36 rule exists because people who borrow more often struggle with their payments later, especially if their income drops or an unexpected expense comes up.
Before you accept a lender's offer, ask yourself: if my income dropped 10 percent, could I still make this payment? If the answer is no, the loan is larger than your real budget allows.
Factor in property taxes, insurance, and maintenance costs
Your monthly housing cost is more than just the mortgage payment. Property taxes vary widely by location — some areas charge 0.5 percent of your home's value per year, others charge 2 percent or more. Homeowners insurance typically costs $1,000 to $2,000 per year, though that varies by location and the home's value. If you put down less than 20 percent, you will also pay mortgage insurance, which is usually 0.5 to 1 percent of your loan amount per year.
Many lenders bundle these into a single monthly payment called PITI — Principal, Interest, Taxes, and Insurance. When you use a mortgage calculator, make sure you understand whether the number it shows includes taxes and insurance or just the loan payment itself.
Beyond that, plan for maintenance and repairs. A common rule is to set aside 1 percent of your home's purchase price per year for upkeep. A $300,000 home would need roughly $3,000 per year, or $250 per month. This is not a payment you owe a lender, but it is real money you will need.
Adjust your expectations based on your down payment and interest rate
Two things you control before you borrow are your down payment and the interest rate you accept. A larger down payment means you borrow less, so your monthly payment is lower. Putting down 20 percent instead of 10 percent reduces your loan amount and eliminates mortgage insurance, which can save you $200 to $400 per month.
Your interest rate depends partly on market conditions — which you cannot control — and partly on your credit score, income stability, and the type of loan you choose. A better credit score usually gets you a lower rate. A fixed-rate loan costs more per month than an adjustable-rate loan at first, but your payment never changes, which makes budgeting easier.
Before you talk to a lender, think about what down payment you can actually save and what loan length makes sense for your life. A 15-year loan builds equity faster but costs more per month. A 30-year loan spreads the cost over more years, so the payment is lower, but you pay much more interest overall.
Build in a safety margin for life changes
The 28/36 rule is a starting point, not a ceiling. Life changes — a job loss, a medical emergency, a child's unexpected needs — happen to most people. If your housing payment takes up the full 28 percent of your income, you have no room to absorb a setback.
Many financial advisors suggest aiming for 20 to 25 percent of your gross income for housing instead, especially if you have irregular income, dependents, or little savings. That gives you breathing room if something goes wrong. It also leaves more money for other goals — saving for retirement, building an emergency fund, or paying down other debt.
The right mortgage payment for you is not the highest amount a lender will approve. It is the amount that lets you sleep at night and still have money left over for the rest of your life.
Frequently Asked Questions
What if I have a variable income or work as a freelancer?
Lenders typically average your income over two years and may discount it by 25 percent to account for ups and downs. If you earned $60,000 last year and $50,000 this year, they might use $41,250 as your may have access to income. Use your most conservative estimate when calculating your budget, and aim for the lower end of the 28/36 range.
Does the 28/36 rule change if I have a co-borrower?
Yes. Lenders add both incomes together and explore the 28/36 rule to the combined total. If you and a partner earn $5,000 and $3,000 per month, your combined gross income is $8,000, and 28 percent is $2,240. However, both of your debts count toward the 36 percent limit, so existing loans or credit cards reduce how much you can borrow together.
What if I want to borrow more than the 28/36 rule allows?
Some lenders will approve you for more, especially if you have excellent credit, a large down payment, or very low other debts. However, borrowing beyond the rule increases your risk of payment trouble if your circumstances change. Before you stretch your budget, make sure you have a solid emergency fund and that you genuinely want to spend that much of your income on housing.
Should I use a 15-year or 30-year mortgage?
A 15-year mortgage costs more per month but you pay far less interest and own your home faster. A 30-year mortgage has a lower monthly payment, leaving more money for other goals. The right choice depends on your income stability, other financial goals, and how long you plan to stay in the home. A mortgage calculator can show you the payment difference for your situation.
How much should I save for a down payment?
Twenty percent is the traditional target because it eliminates mortgage insurance and usually gets you better interest rates. However, many programs allow 3 to 5 percent down. A smaller down payment means a higher monthly payment and mortgage insurance costs, so factor that into your budget calculation before you decide how much to save.