A mortgage pre-approval tells you what a lender will let you borrow. It doesn’t tell you what you can actually afford. Those two numbers are often far apart, and the difference shows up in your budget every month for decades.
Here’s how to find your real number.
The 28/36 Rule
The 28/36 rule is the standard starting point for affordability. It comes from conventional mortgage underwriting and has stood the test of time as a reasonable guardrail.
- 28%: Your total monthly housing payment should be no more than 28% of your gross monthly income (before taxes).
- 36%: Your total monthly debt — housing plus all other debt payments — should be no more than 36% of gross monthly income.
If you earn $80,000 per year ($6,667/month gross):
- Maximum housing payment: $6,667 × 0.28 = $1,867/month
- Maximum total debt: $6,667 × 0.36 = $2,400/month
- If you have $400/month in student loans and a $300/month car payment, that’s $700 in existing debt, leaving $1,700/month for housing — less than the 28% ceiling
The more debt you carry, the less house you can afford within healthy ratios.
What Goes Into Your Monthly Housing Payment
A mortgage payment is not just principal and interest. The true monthly cost is often called PITI, and it’s higher than most first-time buyers expect.
| Component | What It Is |
|---|---|
| P — Principal | The portion of your payment that reduces the loan balance |
| I — Interest | The lender’s cost for giving you the loan |
| T — Taxes | Property taxes, usually collected monthly and held in escrow |
| I — Insurance | Homeowner’s insurance, also often escrowed |
| PMI | Private mortgage insurance if your down payment is under 20% |
| HOA fees | Monthly homeowner’s association dues, if applicable |
In many markets, property taxes and insurance add 20–35% on top of principal and interest. A house with a $1,400 principal-and-interest payment might have a real monthly cost of $1,800 or more once you add taxes and insurance.
Always run your affordability math using PITI, not just the mortgage payment. See What Is PMI? for more on how private mortgage insurance affects your monthly cost.
Pre-Approval vs. What You Can Actually Afford
Lenders pre-approve you for what they’re willing to lend, not what’s comfortable for your lifestyle. Banks use their own qualifying ratios — often allowing debt-to-income ratios up to 43% or higher for certain loan types. Getting approved for $450,000 doesn’t mean $450,000 is wise.
The difference matters because lenders don’t know:
- How much you spend on food, transportation, childcare, or hobbies
- Whether you’re saving for retirement or just starting out
- What you spend on utilities and maintenance in the neighborhood you’re targeting
- Your job security or income trajectory
Getting pre-approved is an important step in how the home buying process works. But treat the pre-approval as a ceiling, not a target.
A Worked Example: $80,000 Gross Income
Here’s how the math plays out for a household earning $80,000 per year.
Gross monthly income: $6,667
28% housing limit: $1,867/month (total PITI)
Existing debt: $600/month (student loans + car)
Adjusted housing budget (36% rule): $6,667 × 0.36 = $2,400 − $600 = $1,800/month
The binding constraint here is the 36% rule, leaving $1,800/month for housing.
What does $1,800/month buy?
At a 7% mortgage rate with a 10% down payment ($27,000 down on a $270,000 home):
- Monthly P&I: ~$1,615
- Estimated taxes + insurance: ~$350/month
- Total PITI: ~$1,965 — over budget
At 20% down ($54,000 down on a $270,000 home):
- Monthly P&I: ~$1,435
- No PMI
- Estimated taxes + insurance: ~$350/month
- Total PITI: ~$1,785 — within budget
This is why the down payment size matters. More money down means a smaller loan, lower monthly payments, and often no PMI.
The True Cost of Ownership Beyond the Mortgage
The mortgage is the biggest number, but it’s not the only number. Budget for these ongoing costs before you commit.
Maintenance and repairs: plan for 1% of home value per year. On a $300,000 home, that’s $3,000 per year, or $250/month, set aside for the furnace that dies, the roof that needs work, the water heater that fails. Older homes and fixer-uppers may need more.
Utilities: Homeowners typically pay more for utilities than renters — larger spaces, older systems, and full responsibility for all utility costs. Budget $200–$400/month depending on home size and climate.
Landscaping and outdoor maintenance: Lawn care, snow removal, gutter cleaning. Easy to overlook, real enough to budget for.
HOA fees: If the home is in an HOA, monthly dues can range from $50 to several hundred dollars. Factor these into your PITI calculation.
Closing costs: Typically 2–5% of the home purchase price, paid at closing. See what are closing costs for a full breakdown. These are due upfront and separate from your down payment.
For a more complete picture of what homeownership really costs, read The True Cost of Owning a Home.
Down Payment Size and PMI
The size of your down payment directly affects your monthly cost in two ways: it reduces the loan amount (lower P&I), and if you put down 20% or more, it eliminates PMI.
PMI is an insurance policy that protects the lender — not you — if you default. It typically costs 0.5–1.5% of the loan amount annually. On a $250,000 loan, that’s $1,250–$3,750 per year, or $100–$300/month added to your payment. It’s not permanent: once you have 20% equity in the home, you can request cancellation.
If you’re not at 20% down yet, see renting vs. buying a home for a clear-eyed comparison. Sometimes waiting longer to save a larger down payment is the right call.
How to Stress-Test Your Budget
Before you commit to a price range, run two stress tests.
Test 1 — Rate change: If rates rise by 1% before you close, what does that do to your payment? A $300,000, 30-year loan at 7% is $1,996/month. At 8%, it’s $2,201. That’s $200/month more. Is your budget still comfortable?
Test 2 — Income change: What if one income in a dual-income household disappears for six months? Could you cover the mortgage on one salary? If not, your price range is probably tied too tightly to your current income.
The goal isn’t to buy the least house possible. It’s to buy a house you can comfortably afford for decades — including when things don’t go perfectly.
Frequently Asked Questions
Q: Should I use gross or net income when calculating affordability?
Standard mortgage ratios use gross income (before taxes) because that’s how lenders qualify you. But a practical check uses your take-home pay. If 28% of your gross is $1,800/month but your entire take-home after taxes is $4,500/month, spending $1,800 on housing leaves $2,700 for everything else. Make sure that works with your actual budget before deciding it’s affordable.
Q: What if my income is variable or I’m self-employed?
Use a conservative income estimate — typically the lower of your last two years of income, which is how lenders will calculate it. A two-year history of self-employment income is usually required for mortgage qualification. Lenders will average it, and if income dropped year over year, some will use the lower figure.
Q: Does my credit score affect what I can afford?
Your credit score affects your interest rate, which directly affects your monthly payment. A borrower with a 760 score might get a rate a full percentage point lower than a borrower with a 680 score on the same loan. On a $300,000 mortgage, 1% in rate difference is about $175/month — roughly $63,000 over the life of the loan. If your score needs work, it may be worth improving it before applying. See what is a credit score for how scores are built.
Q: Is it ever smart to buy less house than I qualify for?
Almost always. Buying below your maximum qualification keeps your monthly payment lower, leaves room in your budget for savings and emergencies, reduces financial stress, and gives you flexibility if your income changes. The term “house poor” describes homeowners who own a nice home but have no financial breathing room. It’s worth avoiding.