How Much House Can You Actually Afford? The 28/36 Rule and the Real Costs

The bank will happily tell you the maximum it will lend you. That number is not your budget — it is the bank’s risk calculation, and it routinely exceeds what a household can carry comfortably. Buying at the top of your approval is how people become house-poor: owners of a beautiful property with no money left for anything else in life. Here is how to calculate what YOU can afford, which is a different and much more useful number.

Start with the classic 28/36 rule. Lenders have long used two ratios. The front-end ratio: your total monthly housing costs — mortgage principal and interest, property tax, homeowner’s insurance, and HOA dues if any — should stay at or below 28% of your gross monthly income. The back-end ratio: ALL your monthly debt payments, housing included (car loans, student loans, minimum card payments), should stay at or below 36% of gross income. On a $6,000 monthly gross income, that means housing around $1,680 and total debts around $2,160. The rule is old because it works: households inside it generally breathe; households far outside it generally struggle.

Gross income is the flattering number — check against take-home too. The 28/36 rule uses gross pay, but your life is lived on net pay. A useful cross-check: housing costs above roughly a third of your TAKE-HOME pay demand sacrifices elsewhere that should be chosen consciously, not discovered. Run both calculations and respect the stricter one; your future monthly self will thank you in the months when the car, the boiler and the dentist all conspire at once.

The costs nobody puts in the listing photos. The mortgage is only the rent you pay the bank. Ownership adds: property tax (often 1–2% of the home’s value yearly, varying hugely by state), homeowner’s insurance, maintenance — a common rule of thumb is 1% of the home’s value per year, and lumpy: roofs and boilers do not fail monthly, they fail expensively — plus utilities for a bigger space, and private mortgage insurance (PMI) if your down payment is under 20%, which adds a monthly charge for the bank’s protection, not yours. A $400,000 home can easily carry $900+ a month of non-mortgage costs. Budget the house, not the loan.

The down payment changes everything downstream. Twenty percent down removes PMI and shrinks the loan; it also takes years longer to save. Smaller down payments (3–5% on many conventional loans, 3.5% FHA) get people into homes sooner but raise every monthly number and the total interest paid. Neither answer is morally superior — the trade-off is time. What matters is doing the comparison with real numbers: run the same house at 5%, 10% and 20% down, including PMI and the years of extra saving each scenario demands, before deciding which patience you are actually buying.

Stress-test the payment before life does. Lenders qualify you on today’s income and today’s rates. Test the purchase against ruder scenarios: could the household carry the payment on ONE income for six months? What if rates were 1% higher at purchase (check the payment jump — on a large loan it is hundreds a month)? What remains for savings AFTER the full housing cost — because a home bought by sacrificing all retirement saving can cost more in compounding than it gains in equity. If the answers are survivable, the house fits. If the answers need everything to go right forever, it does not — however beautiful the kitchen.

Do not forget the exit and entry tolls. Buying costs roughly 2–5% of the price in closing costs; selling later costs around 6–10% in agent commissions and fees. That is why the old advice to stay at least five years exists: a home bought and sold in two years can lose money even if its price rises modestly, because the tolls eat the gain. Your timeframe is part of affordability, not a separate question.

Pre-approval is not a budget — and it expires. Understand the paperwork hierarchy. A pre-qualification is a rough estimate based on what you tell a lender, worth little. A pre-approval involves verified documents and a credit check, and sellers take it seriously — but it is a statement about the bank’s willingness, not your household’s capacity, and it typically expires in 60 to 90 days. Getting pre-approved for $600,000 does not make a $600,000 house affordable, any more than a credit card limit is a spending target. Treat the letter as your ceiling of permission, then shop from your own calculated number, which you built from the ratios and real costs above. Buyers who reverse that order spend the viewing tour falling in love with houses their bank chose for them.

A closing rule that prevents house-poverty. Choose the payment that lets the REST of your financial life continue untouched — emergency fund growing, retirement contributions unreduced, one holiday a year still possible. A house is the largest purchase of your life and it should feel like it: significant, stretching in the good months-noticing way, but never like a monthly bill you resent. If the numbers only work when you stop living, the house is too expensive for you — whatever the bank’s letter says.