Glossary · Definition
How much house can I afford
Use the 28/36 rule: PITI (principal + interest + tax + insurance) should be at or below 28% of gross monthly income; total debt payments should be at or below 36%. Lender pre-approvals routinely allow 43-50% — that’s lender-comfortable, not lifestyle-comfortable.
Definition
Use the 28/36 rule: PITI (principal + interest + tax + insurance) should be at or below 28% of gross monthly income; total debt payments should be at or below 36%. Lender pre-approvals routinely allow 43-50% — that’s lender-comfortable, not lifestyle-comfortable.
What it means
Lenders use Debt-to-Income (DTI) ratios to determine maximum loan size. Conforming conventional: 43-45% DTI cap. FHA: 50%. VA: up to 60%+. The 28/36 rule (PITI ≤ 28%, total-debt ≤ 36%) is the personal-finance recommendation — what you can afford while still hitting other financial goals (retirement contributions, kids’ college, vacations, emergency fund). The gap between 28% and lender-max 45% is “house-poor territory” — technically affordable but constraining everything else. Most CFP-certified planners recommend 25/30 for additional safety margin against job loss or rate adjustment.
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Why it matters
Buying at the lender max means devoting most discretionary income to housing. A $100K-earner pre-approved at 45% DTI ($3,750/month PITI) buys a $470K home but has $200-500/month less than the 28% buyer for retirement, vacations, kids’ activities, and emergencies. The mortgage is technically affordable; the lifestyle isn’t. Cars and student loans further squeeze. Always run the 28% rule yourself, ignore the “you qualify for X” pre-approval letter, and buy 10-20% below max for safety margin.
Example
$100K gross income = $8,333/month. 28% PITI ceiling = $2,333/month. With 20% down, 6.5% rate, 1.2% tax, $100/mo insurance: about a $310K-330K home. Lender max (45% DTI): $470K home. Difference: $400/month freed up for retirement, vacations, emergencies.
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Frequently asked questions
Should I use gross or net income for the 28% rule?
Lenders use gross. Personal finance experts increasingly recommend net (after-tax take-home) for self-imposed limits, since that’s the actual money available.
What if I can’t afford a home in my city?
Three options: wait + save more, move to a lower-cost-of-living area, or adjust expectations (smaller home, fixer-upper, longer commute). Renting indefinitely in HCOL is often financially equivalent to ownership when accounting for opportunity cost.
Does a co-borrower change affordability?
Yes — combined gross income raises the 28% ceiling. But lenders evaluate the lower credit score for rate determination, so a partner with poor credit can hurt the deal.
Related terms
- DefinitionMortgage interestMortgage interest is the cost of borrowing money to buy a home, calculated monthly on your remaining principal balance. Because each payment retires some principal, interest paid declines over time — and that’s why early prepayment saves dramatically more than late prepayment.
- Definition15-year vs 30-year mortgageA 15-year mortgage cuts total interest by 50-65% but typically doubles the monthly payment. A 30-year keeps payment low and lets you invest the difference. Which wins depends on your investment-return assumption and cash-flow priorities.
- DefinitionAmortizationAmortization is the process of paying off a loan with equal periodic payments that are split between interest and principal. In the early months, most of your payment goes to interest; as the balance shrinks, more goes to principal.