How Much Mortgage Can You Afford?

The 28/36 Rule

A common starting point for determining mortgage affordability is the 28/36 rule.

Why these percentages? They help lenders and borrowers gauge whether a mortgage payment is sustainable relative to income and other obligations. The rule is a benchmark, not a hard requirement—some borrowers may qualify with higher ratios, while others may prefer a more conservative approach.

Calculating Your Debt-to-Income Ratio

Your debt-to-income (DTI) ratio is a key measure lenders use to assess affordability. It compares your total monthly debt payments to your gross monthly income. A lower DTI indicates a more manageable debt load and often improves your chances of mortgage approval.

To calculate your DTI, sum up all monthly debt payments—such as student loans, auto loans, credit card payments, and any other recurring debts—and divide that total by your gross monthly income. The result is expressed as a percentage.

• Monthly debt payments include student loans, auto loans, credit cards, and other obligations.
• A lower DTI can improve your ability to qualify and may lead to better loan terms.

Down Payment on Affordability

Your down payment plays a central role in affordability. A larger down payment reduces the loan amount, which directly lowers your monthly payments and the total interest paid over the life of the loan. It can also help you qualify for a lower interest rate, as a higher down payment reduces the lender's risk.

On conventional loans, private mortgage insurance (PMI) is typically required when your down payment is less than 20%. PMI adds to your monthly costs, making the loan less affordable. Putting down at least 20% usually eliminates the need for PMI, reducing your monthly payment further.

Down payment requirements vary by loan type. Conventional loans often allow as little as 3% down, FHA loans require 3.5%, and VA and USDA loans may allow 0% for eligible borrowers. However, a smaller down payment means a higher loan-to-value (LTV) ratio, which lenders may view as riskier, potentially leading to higher interest rates.

• Larger down payment → lower loan amount, lower monthly payments, less total interest.
• PMI is typically required on conventional loans with a down payment under 20%.
• Minimum down payments: conventional 3%, FHA 3.5%, VA/USDA 0% for eligible borrowers.
• Higher LTV from a smaller down payment may increase interest rates.

Sources: Consumer Financial Protection Bureau, Broadview Federal Credit Union, Rocket Mortgage, HSH.com, Bank of America

Other Costs of Homeownership

Beyond the mortgage payment itself, homeownership brings additional costs that affect affordability. Property taxes, homeowners insurance, and, if applicable, homeowners association (HOA) fees can significantly increase your monthly housing costs. These are often included in an escrow account as part of your monthly mortgage payment.

When assessing how much you can afford, you must account for these recurring expenses, as they directly impact your front-end ratio.

Additionally, maintenance and repair costs are part of homeownership, though they are not always included in affordability calculations. A prudent budget sets aside funds for unexpected repairs and ongoing upkeep.

• Property taxes and homeowners insurance are recurring costs that increase your monthly housing payment.
• Some lenders include them in your mortgage payment through escrow.
• Maintenance and repairs are additional out-of-pocket costs to plan for.

Using a Mortgage Payment Calculator

A mortgage payment calculator is a helpful tool to estimate your monthly payment based on loan amount, interest rate, and loan term. It typically shows the breakdown between principal and interest, and may allow you to include taxes and insurance for a fuller picture.

To use one effectively, input the loan amount you're considering, a realistic interest rate based on current market conditions, and the loan term (e.g., 30 years). The calculator will show you the principal and interest portion.

Remember that calculators provide estimates only. Your actual payment may vary based on lender fees, PMI, and other factors. Use them as a planning tool, not a guarantee.

• Inputs typically include loan amount, interest rate, and loan term.
• Include taxes and insurance for a realistic total payment.
• Compare the result to your budget and the 28/36 rule.
• Estimates are not final; actual costs may differ.

Stress Testing Your Budget

Affordability isn't just about meeting lender requirements—it's about ensuring you can comfortably manage your mortgage payment over the long term. Stress testing your budget means considering scenarios like a reduction in income, unexpected expenses, or a rise in interest rates if you have an adjustable-rate mortgage.

A conservative approach is to leave yourself a buffer.

If not, you may want to consider a less expensive home or save a larger down payment to lower your monthly obligation.

• Consider potential income changes, emergencies, and maintenance costs.
• Aim for a payment that leaves a comfortable buffer in your budget.
• Evaluate how a rate increase could affect an adjustable-rate mortgage.