A step-by-step way to work out a realistic home price from your income, debts, down payment and interest rate, with the numbers worked out for you.
Most lenders start from a guideline called the 28/36 rule. Your total housing payment should not be more than 28% of your gross monthly income, and all your monthly debt payments together, housing included, should not be more than 36%. A quick rule of thumb you may also hear is that a home costs about 2.5 to 3 times your annual income. For someone earning $85,000, that would be $212,500 to $255,000. The 28/36 rule is more precise, because it also accounts for your debts, your down payment and today's interest rates. With $300 a month in other debts, a $30,000 down payment and a 6.75% rate, the same $85,000 income supports a home of about $262,700.
The steps below show how to get to your own number. To skip the arithmetic, the House Affordability Calculator does all of it in one go, and every example here can be reproduced in it.
Use your gross income, meaning before taxes, because that is what lenders use. Divide your annual income by 12, then multiply by 0.28. At $85,000 a year, gross income is $7,083 a month, and 28% of that is $1,983.33. That is the most a lender's guideline would want you to spend on housing each month. Housing means the whole payment, not just the mortgage: principal and interest, property tax, homeowner's insurance, and private mortgage insurance (PMI) if your down payment is under 20%.
Now count every other monthly debt payment: car loans, student loans, credit card minimums, personal loans. At $85,000, 36% of gross income is $2,550 a month. If your other debts are $300, that leaves $2,250 for housing, which is more than the $1,983.33 from step 1, so the 28% limit is the one that applies. If your debts were $800, the 36% limit would leave only $1,750, and it would take over. In general, the lower of the two numbers is your maximum housing payment.
This is why debts can matter as much as income. With the same $85,000 income and a $30,000 down payment, the affordable price is about $262,700 with $0 or $300 in other debts, about $258,500 with $600, and only about $207,900 with $1,000. Use the debt-to-income calculator to see your own ratio, and read whether to pay off debt before buying a house if you carry balances.
Your maximum payment has to cover four things, so the price is worked out backwards. Take the $1,983.33 maximum, subtract the property tax and insurance, and what remains has to cover principal and interest, plus PMI when the down payment is under 20%. With a 6.75% rate on a 30-year loan, a 1.1% property tax rate, $1,400 a year in insurance and 0.6% PMI, the result for the $85,000 earner is a price of about $262,700 with a $232,700 loan, which is 11.4% down. The monthly payment then breaks down as $1,509.47 in principal and interest, $240.83 in tax, $116.67 in insurance and $116.36 in PMI, for a total of $1,983.33.
The table below uses $300 in monthly debts, a 6.75% rate on a 30-year loan, and the same tax, insurance and PMI assumptions. Each price is the largest one that keeps the payment within the 28% limit, with the down payment set as a percentage of the price. In every row the 28% limit applies.
Two things stand out. First, a larger down payment lifts the price you can reach, because it avoids PMI and reduces the loan that your payment has to cover. Second, the price depends strongly on how much cash you have. Someone with $85,000 in income and only $26,000 saved is looking at homes near $259,000, while $61,000 saved opens up homes near $306,000.
The rate has a big effect, because it sets how much of your payment goes to interest. For the $85,000 example with $300 in debts and $30,000 down, the affordable price is about $289,200 at 5.5%, $278,100 at 6%, $262,700 at 6.75%, $248,700 at 7.5% and $240,100 at 8%. That is a drop of roughly $18,000 to $21,000 for each additional full point of rate near today's levels. On a $240,000 loan, going from 6.75% to 7.75% raises the principal and interest payment by about $163 a month. It is worth checking your credit report and comparing lenders, since a better rate is worth real money.
The down payment is not the only upfront cost. Closing costs are often 2% to 5% of the loan amount, and you will also want money for moving, repairs and an emergency fund. On a $300,000 home with 20% down, the down payment is $60,000 and the loan is $240,000. Closing costs of 2% to 5% add $4,800 to $12,000, so you need about $64,800 to $72,000 before moving costs and reserves. If you are still saving, the savings calculator shows how long it will take to reach that figure.
A mortgage payment is only part of the cost. Maintenance and repairs are often estimated at about 1% of the home's value per year, which is $250 a month on a $300,000 home. Some homes also have homeowners association (HOA) dues, and utilities are usually higher than in a small rental. Take the $300,000 example with 20% down. Principal and interest is $1,556.64, tax is $275.00 and insurance is $116.67, which is $1,948.31 a month. Add $250 for maintenance and the real monthly cost is close to $2,200, before HOA dues and utilities.
To carry the $1,948.31 payment under the 28% limit, you would need a gross income of about $83,500 a year, assuming your other debts are $300 a month or less. If you had $800 a month in other debts, the 36% limit would apply and you would need about $91,600. To see the full monthly breakdown for a specific home, use the Mortgage Calculator.
The 28/36 guideline tells you what a lender may approve. It does not know about your childcare costs, your commute, or how secure your job is. Because 28% is measured on gross income, it takes a larger share of your take-home pay, so check it against your actual budget. The budget calculator shows how a housing payment fits alongside the other things you spend on and save for, and the salary calculator converts your gross pay into take-home pay. Many buyers choose a price below their maximum, especially if they want to keep saving for retirement, keep a larger emergency fund, or expect their income to change.
Being able to afford a home is not the same as it being the better choice. If you might move within a few years, renting can come out ahead, because buying and selling costs are large. Compare both options for your own situation with the rent vs. buy calculator.
What is the 28/36 rule?
It is a lending guideline that says your housing payment should not be more than 28% of your gross monthly income, and your total monthly debt payments, including housing, should not be more than 36%. It is a starting point, and actual limits vary by lender and loan program.
How much house can I afford on a $100,000 salary?
With $300 in other monthly debts, a 6.75% rate on a 30-year loan and typical tax and insurance, about $363,100 with 20% down or about $307,700 with 10% down. Your own answer depends on your debts, down payment and rate, so run your numbers in the House Affordability Calculator.
Is it better to use the 28/36 rule or a multiple of my income?
The 28/36 rule is more precise, since it takes debts, down payment and interest rates into account. Multiples such as 2.5 to 3 times your income are a quick sanity check, but they ignore your monthly obligations and can be too high when rates are high.
Does the calculation use gross or net income?
Lenders use gross income, before taxes. That is why 28% of gross income can feel like a bigger share of your take-home pay. Check the result against your actual budget.
How does my down payment change how much I can afford?
A bigger down payment lowers your loan and, at 20% or more, removes PMI. In the $85,000 example, a $30,000 down payment supports about $262,700, and $60,000 supports about $300,000, which is exactly 20% down.
Do other debts really matter that much?
They can. If your debts are low, the 28% housing limit applies and paying off a car loan will not change the price. If your debts are high, the 36% limit applies and every dollar of monthly debt reduces your housing budget by a dollar. At $1,000 a month in debts, the $85,000 example drops from about $262,700 to about $207,900.
What other costs should I plan for besides the mortgage?
Property tax and insurance are part of the payment. Beyond that, plan for maintenance, which is often estimated at about 1% of the home's value a year, HOA dues if any, utilities, closing costs of about 2% to 5% of the loan, and moving costs.
Should I buy the most expensive home I qualify for?
Usually not. The maximum is what a guideline allows, not what fits your life. Many buyers aim for a price with room left in their monthly budget for savings, repairs and changes in income.