The 28/36 rule
Many lenders use two limits on gross monthly income:
- 28% for housing: mortgage payment, property tax, home insurance and any HOA fees.
- 36% for all debt: housing plus car loans, student loans and card minimums.
On 90,000 a year, 7,500 a month, housing should stay under 2,100. With 400 a month of other debt, the 36% limit of 2,700 leaves 2,300, so the lower figure, 2,100, sets the budget. Some loan programs allow a total of up to 43% or more.
From payment to price
The home price you can afford depends on the interest rate, the loan term, taxes and insurance, and the down payment. A higher rate shrinks the loan the same payment can support, so affordability changes as rates move.
Down payment
20% down usually avoids private mortgage insurance. Less is possible, but the loan and the payment are larger. Budget for closing costs too, often 2 to 5% of the price.
Buy or rent
Buying tends to pay off the longer you stay, because the costs of buying and selling are spread over more years. Over a short stay, renting and investing the difference can come out ahead.
Calculators
The Home Affordability Calculator estimates your price range, the Down Payment Calculator works out the cash to close, and the Rent vs Buy Calculator compares both over the years you plan to stay. Later on, the Refinance Calculator shows whether a new rate is worth the closing costs.
From budget to price, worked through
Take the 2,100 housing budget from the example above. Property tax, insurance and HOA fees of 450 a month leave 1,650 for principal and interest. On a 30-year loan with 20% down:
| Interest rate | Loan 1,650 a month supports | Home price with 20% down |
|---|---|---|
| 5.5% | 290,600 | 363,300 |
| 6.5% | 261,000 | 326,300 |
| 7.5% | 236,000 | 295,000 |
Each point of interest moves the price by 30,000 to 37,000 here, with the same monthly payment.
Common mistakes
- Treating the pre-approval as the budget. A lender approves the most it will lend, not what fits your other goals, such as saving for retirement or childcare.
- Leaving out upkeep. Repairs and maintenance often run 1 to 2% of the home's value a year. On a 330,000 home, that is 275 to 550 a month on top of the payment.
- Forgetting mortgage insurance. With less than 20% down, private mortgage insurance is often around 0.5 to 1.5% of the loan a year, added to the monthly payment until enough equity builds up.
- Using all your savings for the down payment. Keep an emergency fund after closing. A new home's first surprise repair usually comes sooner than expected.