The 28/36 rule, explained
Most lenders use a guideline called the 28/36 rule to determine how much home you can afford. It has two parts:
28% rule: your monthly housing costs (mortgage principal, interest, property taxes, and insurance) should not exceed 28% of your gross monthly income.
36% rule: your total monthly debt payments, including housing plus any car loans, student loans, or credit card minimums, should not exceed 36% of your gross monthly income.
| Rule | Limit | Monthly amount |
|---|---|---|
| 28% housing limit | 28% of $7,083 | $1,983/mo |
| 36% total debt limit | 36% of $7,083 | $2,550/mo |
| Available for housing (after $350 other debts) | 36% limit minus debts | $2,200/mo |
In this example, the binding constraint is actually the lower of the two numbers — $1,983 from the 28% rule — since it's more restrictive than the $2,200 left over under the 36% rule.
How down payment changes your purchasing power
The same monthly budget can afford a meaningfully different home price depending on your down payment, since a larger down payment means a smaller loan and lower monthly principal and interest.
| Down payment | Approx. home price |
|---|---|
| 5% | $295,000 |
| 10% | $310,000 |
| 20% | $345,000 |
Going from 5% to 20% down on the same budget increases your purchasing power by roughly $50,000, largely because you eliminate PMI and reduce the loan amount needing to fit inside your payment limit.