What your monthly payment can realistically be
Your monthly housing payment should not exceed 28 percent of your gross monthly income — that is the threshold most lenders use, and it is the number that matters when a bank decides whether to lend to you. If you earn $5,000 a month before taxes, lenders will typically approve a housing payment up to $1,400. That payment includes your mortgage principal and interest, property taxes, homeowners insurance, and mortgage insurance if your down payment is less than 20 percent.
The 28 percent rule exists because lenders have decades of data showing that borrowers who spend more than that on housing are more likely to default. It is not a suggestion — it is the boundary between what you can borrow and what you cannot. Some lenders will stretch to 30 or 31 percent if you have excellent credit and low other debts, but most will not.
Your actual affordability also depends on your other monthly debts. If you carry car loans, student loans, credit card balances, or child support, lenders look at your total debt-to-income ratio — all your monthly debt payments divided by your gross income. Most lenders want that ratio to stay below 43 percent. This means if you have $800 in car and student loan payments, your housing payment can only be $1,370 on a $5,000 monthly income, not the full $1,400.
Key Takeaways
- Lenders typically cap your housing payment at 28 percent of your gross monthly income, which includes mortgage, taxes, insurance, and mortgage insurance.
- Your total debt-to-income ratio — all monthly debts divided by gross income — cannot exceed 43 percent for most conventional loans.
- A larger down payment reduces your monthly payment by lowering the loan amount and eliminating mortgage insurance.
- Property taxes and insurance vary by location and can swing your actual payment by hundreds of dollars on the same home price.
- Your credit score affects the interest rate you receive, which directly changes how much home price you can afford at your target monthly payment.
How down payment size changes what you can afford
A larger down payment lowers your monthly payment in two ways: it reduces the amount you need to borrow, and it eliminates private mortgage insurance (PMI) if you put down 20 percent or more. PMI typically costs 0.5 to 1 percent of your loan amount annually, divided into your monthly payment. On a $300,000 loan, that is $125 to $250 per month you would not owe if you had saved an extra $60,000 for a 20 percent down payment.
The math is straightforward. If you can afford a $1,400 monthly payment and you have a 6 percent interest rate, a 3 percent down payment lets you borrow roughly $230,000 (including PMI costs). A 20 percent down payment at the same rate and payment lets you borrow roughly $280,000. The difference is $50,000 in home price from the same monthly payment, straightforward because you avoided PMI and borrowed less.
Down payment programs vary by state and by lender. Some programs offer down payment information of 3 to 5 percent, which reduces what you need to save but does not eliminate PMI. Others require you to save the full amount yourself. Your local housing authority or a mortgage broker can tell you what programs exist in your area.
Interest rates and credit scores directly affect your payment
A 1 percent difference in your interest rate changes your monthly payment by roughly $200 on a $300,000 loan. If you have a credit score of 620, you might receive a 7.5 percent rate. If your score is 740, you might receive a 6.5 percent rate. On the same $300,000 loan over 30 years, that 1 percent difference means paying $2,071 per month instead of $1,896 — a difference of $175 monthly, or $63,000 over the life of the loan.
Your credit score is not fixed. If you have late payments or high credit card balances, paying those down or bringing accounts current can raise your score by 50 to 100 points over several months. That improvement directly translates to a lower rate and a lower monthly payment. Before you start house hunting, check your credit report for errors and pay down revolving balances if possible.
Interest rates also change with the market. When rates rise, the same home price means a higher monthly payment. When rates fall, your payment drops. Some borrowers lock in a rate when they explore for a mortgage, which protects them if rates rise before closing. Others wait to lock until later in the process. Your lender will explain when you can lock and what happens if rates move.
Property taxes and insurance vary by location and can surprise you
Two identical homes in different counties can have monthly payments that differ by $300 or more, purely because of property taxes and insurance. Property taxes are set by your county or municipality and are based on your home's assessed value. In some states, that assessment is 1 percent of home value annually. In others, it is 0.5 percent or 1.5 percent. A $300,000 home in a 1 percent tax state costs $3,000 per year in property tax alone — $250 per month. The same home in a 0.5 percent state costs $1,500 per year.
Homeowners insurance also varies by location, the age and condition of the home, and the coverage you choose. Homes in areas with high theft, fire risk, or hurricane risk cost more to insure. Older homes with outdated electrical or plumbing systems cost more. A basic policy in one county might be $100 per month; the same coverage in another county might be $150 or $200.
Before you decide what price home you can afford, research the property tax rate and typical insurance costs in the neighborhoods you are considering. Your real estate agent or a local insurance broker can give you ballpark figures. Adding these to your mortgage payment gives you the true monthly cost.
How to calculate what you can afford
Start with your gross monthly income — the amount before taxes and deductions. Multiply by 0.28 to find your maximum housing payment. Then subtract any other monthly debt payments (car loans, student loans, credit cards, child support) and multiply the remainder by 0.43 to find your maximum total debt payment. The smaller of these two numbers is your housing payment ceiling.
Next, estimate your property taxes and insurance. Call your county assessor's office for the tax rate in your target area, and get quotes from two or three insurance companies for a home in that price range. Add these monthly costs to your target mortgage payment. Subtract that total from your housing payment ceiling — what remains is available for principal and interest.
Use an online mortgage calculator to see what loan amount that principal-and-interest payment supports at your expected interest rate. Add your down payment to that loan amount to find your maximum home price. This number assumes you will actually spend 28 percent of your income on housing; many people spend less and have more flexibility in their budget.
| Monthly Income | 28% Housing Limit | 43% Total Debt Limit | Other Monthly Debt | Actual Housing Ceiling |
|---|---|---|---|---|
| $4,000 | $1,120 | $1,720 | $400 | $1,120 |
| $5,000 | $1,400 | $2,150 | $400 | $1,400 |
| $6,000 | $1,680 | $2,580 | $400 | $1,680 |
| $5,000 | $1,400 | $2,150 | $800 | $1,350 |
What happens if you stretch beyond the 28 percent rule
Some borrowers do spend more than 28 percent of their income on housing. Lenders occasionally approve loans at 30 or 31 percent if your credit is strong and you have little other debt. But stretching beyond that threshold creates real financial risk. If your car breaks down, your hours get cut, or an unexpected medical bill arrives, a housing payment that takes 30 percent of your income leaves almost no room to absorb the shock.
The 28 percent rule exists because it is the boundary where most households can still cover other necessities — food, transportation, utilities, childcare — and have a small cushion. Crossing it does not mean you will default, but it means you are statistically more likely to struggle. If you are tempted to stretch, ask yourself whether you could still make the payment if your income dropped by 10 percent.
Frequently Asked Questions
Does my down payment count toward the 28 percent rule?
No. The 28 percent rule applies only to your monthly payment — principal, interest, taxes, insurance, and mortgage insurance. Your down payment is a one-time cost paid at closing and does not affect the monthly calculation. A larger down payment lowers your monthly payment by reducing the loan amount, but the 28 percent threshold stays the same.
What if I have student loans in deferment or forbearance?
Lenders typically count deferred student loans as a monthly debt payment even if you are not currently paying. They use a standard calculation — usually 0.5 to 1 percent of the total loan balance — to estimate what your payment will be when deferment ends. This reduces the housing payment they will approve. If you can pay off or significantly reduce student debt before explore, your housing approval will be higher.
Can I afford a home if I am self-employed?
Yes, but lenders require more documentation. Most want to see two years of tax returns and may average your income across those years if it fluctuates. Some use your most recent year only. Self-employed borrowers often need higher credit scores and larger down payments to offset the income verification challenge. A mortgage broker who works with self-employed borrowers can explain what your specific situation requires.
Does my spouse's income count if we file taxes separately?
Only if you both explore for the mortgage together and both are on the loan. If you explore alone, only your income counts toward the 28 percent calculation. If you explore jointly, both incomes count, and both credit scores matter. Some couples explore separately to keep one person's debt off the process, but this reduces the total housing payment the lender will approve.
What if property taxes or insurance are higher than I estimated?
Your lender will discover the actual amounts during the appraisal and title search, which happen after you make an offer. If taxes or insurance are significantly higher than your estimate, your monthly payment will be higher than you calculated. This can happen before closing, giving you time to renegotiate the price or walk away. Always get firm quotes on taxes and insurance before making an offer, not just estimates.