The 28/36 Rule: What a Lender Will Actually Approve

Underwriting runs downwards from your income, so a price is the last thing it arrives at rather than the first. Two percentages do the arithmetic, and the second one usually bites.

The 28/36 rule, run all the way through

Start with $90,000 a year, which is $7,500 gross a month. The front-end ratio allows 28% of that, $2,100, for principal, interest, property tax and insurance together. The back-end allows 36%, $2,700, for every debt payment including the mortgage.

Now add a $450 car payment and a $250 student loan. That $700 comes out of the $2,700 first, leaving $2,000 for housing. The back-end ratio just cut your budget below the front-end ceiling, which is normal for anyone with a car loan.

From that $2,000, take out the parts that are not the loan. Property tax of $3,600 a year plus insurance of $1,800 is $450 a month, leaving $1,550 for principal and interest. At 6.5% over 30 years, every $100,000 borrowed costs about $632 a month, so $1,550 supports roughly $245,000 of mortgage. With 10% down, that is a house of about $272,000.

Note what happened: a $90,000 income produced a $272,000 house, three times salary, not the four or five times people assume. If that back-end number is new to you, how DTI ratios work covers it in more detail.

What the ratios quietly ignore

Underwriting counts debts, not living costs. Childcare, health premiums, 401(k) contributions, HOA dues and commuting never appear, which is why a lender's maximum and a comfortable payment are different numbers. Maintenance is the other omission: 1% of value a year is $2,720 on a $272,000 house, or $227 a month that no ratio asked about.

How the UK version differs

UK lenders work from an income multiple rather than a monthly ratio. Four to four and a half times income is typical, so a £50,000 salary supports roughly £200,000 to £225,000, subject to a stress test at a higher rate than the one you are offered. Deposit sits on top, and stamp duty is a cash cost at completion rather than something you can borrow.

Using the house affordability calculator

The calculator needs gross annual income, monthly debt payments, down payment, interest rate, property tax and insurance.

Income means gross, before tax and before retirement contributions: the figure at the top of your pay stub, not what hits your bank account. Debt payments mean the minimum shown on each statement, not what you normally pay. If a card shows a $180 minimum on a $9,000 balance, enter $180.

Property tax comes from the county assessor's site or the listing itself, and varies enormously by county, so a national average will mislead you. Insurance should be a real quote for that area, and the rate a lender quote rather than a headline average, which assumes an excellent credit score.

One rule of thumb: at 6.5%, every $100 of monthly debt payment removes about $15,800 of mortgage, because $632 a month carries $100,000, so $100 a month carries $15,800 of it. Clearing a $4,000 card with a $120 minimum therefore hands back nearly $19,000 of borrowing.

Stress-testing the answer

Take whatever the calculator returns and check it against a worse rate. At 7.5% instead of 6.5%, $100,000 borrowed costs $699 a month rather than $632, so the same $1,550 supports $221,700 instead of $245,000. A single percentage point removed $23,300 of borrowing power.

Then check the cash side. Closing costs run 2% to 5% of the loan, and a deposit that leaves nothing behind it is how people end up putting a water heater on a credit card in month three. Our walkthrough on how much house you can afford covers reserves.

Common questions

Does a bigger down payment increase what I can afford? Twice over. It cuts the amount borrowed, and at 20% it removes private mortgage insurance. PMI at around 0.55% on a $245,000 loan is roughly $112 a month, which alone is about $17,700 of extra borrowing capacity.

Do lenders use gross or net income? Gross, before any deduction. That is the most common reason the answer looks too high next to what lands in your account.

Will a car loan I am nearly finished paying still count? Often not. Many loan programs exclude an installment debt with 10 or fewer payments left, so ask the underwriter before rushing to pay it off.

Should I borrow the maximum? Usually not. The maximum marks the point where a stranger with a spreadsheet becomes unwilling to lend, which sits a long way past the payment you would want to meet every month for thirty years.