How Much House Can You Afford?

The 28/36 Rule

The most widely used affordability guideline in mortgage lending is the 28/36 rule. It sets two ceilings on your debt load:

At a household income of $100,000/year ($8,333/month), the 28% ceiling means your total housing payment should not exceed $2,333/month. At a 6.5% rate with 20% down, that supports roughly a $365,000 home — before property taxes and insurance reduce it further.

Many lenders will approve you above 28%, sometimes up to 43% DTI for qualified borrowers. Just because you are approved does not mean you can comfortably make the payment. The 28/36 rule exists to prevent house-poor scenarios where your home consumes so much income that everything else suffers.

How Rates Affect Affordability

Mortgage rates have an outsized impact on what you can afford. A single percentage point changes your buying power by roughly 10%. Here is what a $2,000/month principal and interest payment buys at different rates on a 30-year fixed mortgage:

The total interest column is sobering: at 7%, you pay $420K in interest on a $301K loan — more than the loan itself.

Down Payment Strategies

The traditional 20% down payment is not the only option. Here is how the three main approaches compare:

• 3.5% FHA Loan: Lowest barrier to entry. On a $350K home, you need $12,250 down instead of $70,000. The tradeoff: mandatory mortgage insurance for the life of the loan (0.55% annually), plus an upfront MIP of 1.75%. Best for first-time buyers with limited savings and credit scores of 580+.
• 5-10% Conventional: A middle ground. PMI is required but cancels automatically at 20% equity. PMI rates (0.3-1.5% of loan annually) depend on credit score and LTV. A 740+ credit score with 10% down might pay just 0.3%, making PMI almost negligible.
• 20% Conventional: No PMI, lower monthly payment, stronger offer in competitive markets. But tying up $70K-$100K in a down payment has opportunity cost — that money could earn 8-10% annually in index funds. The math is not as clear-cut as people assume.

PMI: What It Costs and When It Drops

Private Mortgage Insurance protects the lender if you default. You pay for it, but you get no benefit. On a $320K loan with a 5% down payment and average credit, PMI runs roughly $150-$200/month.

With a conventional loan, PMI cancels automatically when your loan-to-value ratio hits 78% (based on the original purchase price). You can request cancellation at 80% LTV. On a 30-year mortgage with 5% down and 3% annual appreciation, you typically hit 20% equity in 5-7 years.

FHA loans are different: if you put less than 10% down, mortgage insurance lasts the entire loan term. The only way to remove it is to refinance into a conventional loan once you have 20% equity.

Pre-Approval vs. Pre-Qualification

These sound similar but carry very different weight:

• Pre-qualification is an informal estimate based on self-reported income and debt. No credit check, no verification. It tells you roughly what you might qualify for, but sellers and agents do not take it seriously.
• Pre-approval involves a hard credit pull, income verification (pay stubs, tax returns, W-2s), and asset documentation. The lender issues a letter stating a specific amount they will lend you. In competitive markets, an offer without a pre-approval letter is effectively ignored.

Get pre-approved before you start house hunting. It sets a realistic budget, shows sellers you are serious, and prevents the heartbreak of falling in love with a home you cannot finance.

Frequently Asked Questions