The question every home buyer asks — and the one most banks answer wrong. A pre-approval letter tells you the maximum a lender will give you. It doesn't tell you what you can comfortably afford. Those are very different numbers.
The 28% rule — your starting point
Financial planners have long used the 28% front-end DTI rule: your total monthly housing payment (principal, interest, taxes, insurance — PITI) should not exceed 28% of your gross monthly income.
So if you earn $8,000/month gross, your max housing payment is $2,240/month.
What counts in your monthly payment?
Your true monthly housing cost has four components (PITI):
- Principal — paying down your loan balance
- Interest — the lender's charge for the loan
- Taxes — property taxes escrowed monthly (varies by state — Illinois averages 2.27%; Hawaii averages 0.28%)
- Insurance — homeowners insurance (~$150–$200/month on a median home)
- PMI — if your down payment is under 20%, add ~0.5–1% of the loan per year
Most online calculators stop at P&I. MorgCalc includes all four (and PMI) so you're not surprised after closing.
Working backward: from payment to price
Let's say your 28% number is $2,200/month. What home price does that translate to?
At today's 30-year rate (~6.5%) with 20% down, a $2,200/month payment corresponds to roughly a $360,000–$380,000 home — depending on your state's property tax rate.
The easiest way to find your exact number: use the MorgCalc affordability calculator →
The 36% back-end DTI — the full picture
Lenders also look at your back-end DTI: total monthly debt payments (housing + car loans + student loans + credit cards) divided by gross income. Most conventional loans cap this at 43–45%, but 36% is the comfortable target.
If you have $400/month in car payments and $200/month in student loans, subtract $600 from your monthly budget before applying the 28% rule.
Down payment: how it changes everything
A larger down payment directly lowers your monthly payment in two ways: smaller loan principal, and elimination of PMI once you reach 20%.
Estimates at 6.5% 30-year fixed. Excludes taxes and insurance.
The rule of thumb most people ignore
Buy the least house that meets your needs, not the most house you can qualify for. Lenders will approve you for more than is comfortable — that's how they make money. Your goal is a payment you can sustain through job changes, rate resets, and life events.
Bottom line
- Use 28% of gross monthly income as your housing payment ceiling
- Include taxes, insurance, and PMI in every estimate
- Account for existing debts before calculating (back-end DTI)
- A bigger down payment buys safety margin, not just lower payments