Most buyers work out their budget backwards. They ask a lender what they can be approved for, treat that number as the budget, and shop to the top of it. Approval and affordability are different questions, though. One is a lender's judgment about whether you'll probably repay a loan; the other is whether the house leaves room for the rest of your life.
This guide covers the ratios lenders actually use, the cash you need beyond the down payment, the recurring costs that never appear in a mortgage quote, and how to set a price ceiling you choose rather than inherit.
The 28/36 rule, and what it really caps
The oldest affordability guideline in mortgage lending is the 28/36 rule, and it's two separate tests.
The front-end ratio caps housing costs at 28% of gross monthly income. Housing here means the full payment — principal, interest, property taxes and homeowners insurance, often abbreviated PITI, plus mortgage insurance and HOA dues where they apply. Not just principal and interest.
The back-end ratio caps total monthly debt at 36% of gross income: the housing payment plus car loans, student loans, minimum credit card payments and any other recurring obligation that shows on your credit report.
Two details matter. Both ratios use gross, pre-tax income, so 28% of gross is a noticeably larger share of what actually lands in your account. And the 28/36 rule is a rule of thumb, not a regulation — no lender must follow it, and plenty go past it.
What lenders will approve is a different number
Knowing your real ceiling means knowing how far underwriting can stretch.
For years, the Consumer Financial Protection Bureau's General Qualified Mortgage test included a hard 43% debt-to-income cap. That changed in 2021: the DTI limit was replaced with a price-based test comparing the loan's APR to the average prime offer rate. Lenders must still consider DTI or residual income under the broader ability-to-repay rule, but 43% is no longer a bright line, and conventional lenders commonly approve above it.
Government-backed loans are more explicit. FHA's baseline ratios are 31/43 — 31% for housing, 43% for total debt. Borrowers with stronger files can go higher: HUD's underwriting guidance allows 37/47 with one documented compensating factor, such as verified cash reserves, a minimal increase in housing payment, or qualifying residual income. Borrowers with credit scores below 580, or no score at all, cannot exceed 31/43 even with compensating factors.
An approval in the 43–50% DTI range is normal. That's the lender's risk tolerance, not a statement about your life. The gap between 36% and 50% of gross income is the gap where retirement contributions, childcare, travel and savings used to live.
The most useful preparation here is often not a bigger down payment but a smaller back-end ratio: every retired car loan or cleared card balance frees room in the 36% test. The Debt Payoff Calculator will show which balance to attack first and when it clears.
The down payment is not the cash you need
Down payment minimums are lower than most people assume. FHA requires 3.5% down with a credit score of 580 or above, and 10% for scores between 500 and 579. Fannie Mae and Freddie Mac have 3%-down conventional products, though availability is limited. VA and USDA loans can require nothing down for eligible borrowers.
The down payment is rarely the binding constraint, though. Three other cash needs sit alongside it:
- Closing costs, commonly 2–5% of the purchase price, due at closing and largely not financeable.
- Reserves — the money left after closing. Spending every dollar of savings on the down payment is among the most common first-time-buyer mistakes, because a house generates expenses immediately.
- Mortgage insurance, if you put down less than 20% on a conventional loan. It's cancellable, under rules worth knowing: you can request removal when the balance is scheduled to reach 80% of the home's original value, and the servicer must terminate it automatically at 78% per the original amortization schedule. Extra principal payments can accelerate the 80% request but not the 78% automatic date.
Loan size has a ceiling too. For 2026, the baseline conforming loan limit for a one-unit property is $832,750, rising to $1,249,125 in high-cost areas and in Alaska, Hawaii, Guam and the US Virgin Islands. Above the applicable limit you're in jumbo territory, where underwriting and reserve requirements are typically stricter.
Build the payment from the bottom up
A mortgage quote tells you about interest. Ownership costs more than interest.
Start with the loan. In mid-October 2026, Freddie Mac's Primary Mortgage Market Survey put the average 30-year fixed rate at about 7.4%, and the National Association of Realtors reported a median existing-home price of roughly $417,500 in September 2026. Put 10% down on that median home at that rate and principal and interest alone run about $2,600 a month. Clearing the 28% front-end test on P&I by itself would take roughly $112,000 in gross annual income — and more once taxes and insurance are added on top.
Then add what the quote omits:
- Property taxes and homeowners insurance, which vary enormously by location and tend to rise over time. A reassessment after purchase can push the escrow payment up sharply.
- Maintenance and repairs, often estimated at 1–2% of the home's value a year. It arrives as a $9,000 roof rather than a tidy monthly line.
- HOA dues, utilities on more square footage than you rented, and furnishing an empty house.
Running those through the Household Budget Calculator alongside your current spending is the step that turns an approval letter into a decision. And if you haven't settled whether buying is the right move at all, the Rent vs. Buy Calculator compares the two over your actual expected holding period, which usually matters more than the monthly comparison.
Set the ceiling yourself
A defensible process: calculate 28% and 36% of gross monthly income for a starting range. Subtract your existing debt payments from the 36% figure to find what's genuinely available for housing. Reserve room inside that number for maintenance and escrow increases rather than spending it all on P&I. Then price the house to that payment — not to the approval amount.
Buying also changes your balance sheet, not just cash flow: it converts liquid savings into equity and adds a large liability. The Net Worth Calculator is a reasonable sanity check before you commit, particularly on how little liquidity remains after closing.
If the number that comes out is below what you hoped, the levers are the ones above: reduce other debt, increase the down payment, extend the timeline, or change the target price. Shopping above your own ceiling because a lender said yes is the one option with no upside.
Frequently asked questions
Is the 28/36 rule still relevant?
As a personal guideline, yes — as a lending standard, no. Lenders aren't required to follow it and routinely approve higher ratios, and the CFPB's 43% Qualified Mortgage DTI cap was replaced with a price-based test in 2021. Treat 28/36 as a conservative ceiling you set for yourself, not a prediction of what you'll be offered.
Does a bigger down payment mean I can afford more house?
It helps, but less than people expect. A larger down payment shrinks the loan, can eliminate mortgage insurance at 20%, and may improve your rate — but taxes, insurance and maintenance scale with the home's value regardless of how much you put down. A 20% down payment on a house whose carrying costs you can't sustain doesn't fix the problem.
Do I need 20% down to buy a home?
No. FHA allows 3.5% down at a 580 credit score, conventional 3%-down products exist with limited availability, and VA and USDA loans can require nothing down for eligible borrowers. Below 20% on a conventional loan you'll pay mortgage insurance until the balance reaches 80% of original value on request, or 78% automatically.
How much should I keep in savings after closing?
There's no official figure, but leaving yourself with nothing is a documented mistake. Repairs, moving costs and the gap before the first payment all arrive early, and your emergency fund still needs to cover job loss — which is harder to absorb with a mortgage than with a lease.
Should I use my pre-approval amount as my budget?
No. A pre-approval reflects a lender's risk assessment using gross income and credit-reported debts. It knows nothing about your childcare costs, retirement contributions, or savings goals. Build the budget from your own numbers, then confirm the house fits inside it.
Disclaimer
This guide is for general educational purposes only and does not constitute personalized financial, tax, or legal advice. Every reader's situation is different — consult a licensed financial advisor, accountant, or attorney before making decisions based on this content. Figures and rules cited here reflect the most recent information available at time of publication and may change; verify current limits and regulations before acting.