Does the lender use gross or net income?

Gross - your income before taxes and deductions. That is why the approval figure can look larger than what feels comfortable from your take-home pay.

Can I get approved with a debt-to-income ratio above 36%?

Frequently, yes. Many programs allow ratios into the mid-40s or higher with compensating factors like reserves or a strong credit profile. Approval and comfort are still two different tests.

How much should I have saved beyond the down payment?

Closing costs of roughly 2% to 5% of the loan amount, plus one to three months of housing payments left in the bank after closing.

First-Time Buyers

How Much House Can I Afford?

The 28/36 rule, the payment formula lenders actually use, and the costs buyers routinely forget when they set a budget.

9 min

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2026-09-01

Last updated

First-Time Buyers

Topic

On this page01Start With What You Can Repay, Not What You Can Borrow 02The 28/36 Rule 03How the Payment Is Actually Calculated 04The Costs Buyers Underestimate 05How to Improve What You Can Afford

Start With What You Can Repay, Not What You Can Borrow

Approval amount and comfortable budget are two different numbers. A lender tells you the ceiling. Your life tells you the number you can carry for the next 20 to 30 years without resenting the house.

Work out the payment first and the price second. Price is just the output of payment, rate, term, and down payment.

Housing payment includes principal, interest, taxes, insurance, HOA, and any mortgage insurance.
Lenders qualify you on that full payment, not just principal and interest.
Leave room for reserves after closing - one to three months of payments is a healthy floor.

What you'll learn in this guide

02The 28/36 Rule
03How the Payment Is Actually Calculated
04The Costs Buyers Underestimate
05How to Improve What You Can Afford

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Plain-English

No jargon, real examples

Written by

Licensed advisors

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First-Time Buyers

Buyers & homeowners

The 28/36 Rule

The long-standing guideline: keep housing costs at or under 28% of gross monthly income, and total monthly debt at or under 36%. It is a starting point rather than a hard ceiling - plenty of programs allow higher ratios - but it reliably describes a payment that feels sustainable.

Those two numbers are your front-end and back-end debt-to-income ratios. Underwriters lean hardest on the back-end figure.

Example on $6,900 gross monthly income

28% housing guideline	About $1,930 per month for the full housing payment
36% total debt guideline	About $2,480 per month including car, cards, and student loans
Room left for other debt	About $550 per month
Front-end vs back-end	28% is housing only; 36% is every monthly obligation

Illustrative only. Actual qualification depends on program, credit, reserves, and the full underwriting review.

How the Payment Is Actually Calculated

Every lender uses the same amortization formula. Three inputs drive it: the loan amount, the interest rate, and the term.

M = P x [ r(1+r)^n ] / [ (1+r)^n - 1 ], where P is the loan amount, r is the monthly rate, and n is the total number of payments. Taxes, insurance, HOA, and mortgage insurance are added on top of that result.

Run It Both Ways

Solve for the payment you want first, then work backward to a price range. It keeps you from touring homes that were never going to fit.

04Section 4

The Costs Buyers Underestimate

Principal and interest is the smallest surprise in homeownership. The rest of the monthly cost is what stretches a budget.

Property taxes and homeowners insurance, both of which rise over time.
Mortgage insurance when the down payment is under 20% on a conventional loan, or on most FHA loans.
HOA dues, which are not negotiable and can increase annually.
Maintenance - budget roughly 1% of the home value each year.
Utilities on a larger space than you rent today.

Do Not Budget to the Approval Letter

The approval is a maximum, not a recommendation. Buying below it is the single easiest way to protect yourself against rate, tax, and insurance changes.

How to Improve What You Can Afford

Affordability is not fixed. Small moves in the months before you apply can change your approval amount noticeably.

Key points

Pay down revolving balances - credit card payments hit your ratio hardest.
Avoid new car loans or financed purchases while you shop.
Raise your credit score to reach better pricing tiers.
Increase the down payment to lower both the loan amount and the mortgage insurance.
Consider a longer term for qualification, then prepay once you are in.

FAQ

Frequently Asked

It depends on your rate, taxes, insurance, and other debts. Under the 28% guideline you would generally want gross income in the range of $110,000 to $130,000, less if you make a larger down payment or carry little other debt.

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How Much House Can I Afford?

Start With What You Can Repay, Not What You Can Borrow

The 28/36 Rule

How the Payment Is Actually Calculated

The Costs Buyers Underestimate

How to Improve What You Can Afford

Frequently Asked

More in First-Time Buyers

The First-Time Homebuyer Guide

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