The number the bank gives you is not the answer
When a friend of mine got preapproved last year, the letter said she qualified for a loan that would have consumed nearly half her take-home pay. The lender was not being reckless by their own rules; a preapproval is simply a ceiling, the most they are willing to risk. It is not advice, and it is definitely not a budget. Treating the ceiling as a target is how people end up house-poor with a lawn.
The old-fashioned tool for finding your own number, as opposed to the bank's, is the 28/36 rule. It is crude, it predates smartphones by decades, and it remains the fastest sanity check available. So let me run it properly, with a realistic salary and today's kind of interest rates, and show where the rule bites and where it lies.
The 28/36 rule in one paragraph
Spend no more than 28% of gross monthly income on housing costs: mortgage principal and interest, property taxes, homeowners insurance, and any HOA dues. And no more than 36% of gross income on all debt combined: housing plus car payments, student loans, and credit card minimums. Two caps, and the stricter one wins.
On a salary of $85,000, gross monthly income is $7,083. The housing cap comes out to $1,983 a month, and the all-debt cap is $2,550. Notice the gap between those two numbers is only $567: if you carry a $450 car payment and $150 in student loans, the 36 side of the rule starts limiting your house budget before the 28 side does. Existing debts and mortgage size are the same budget wearing different hats, which is why clearing balances first, snowball or avalanche, directly raises the house you can afford. I ran that comparison in debt snowball vs avalanche.
The worked example: a $340,000 house at 6.5%
Take a $340,000 house with 10% down, which means $34,000 down and a $306,000 loan. At 6.5% over 30 years, principal and interest come to about $1,934 a month. I checked that in the mortgage payment calculator, and you should rerun it at whatever rate you are actually quoted, because every half point moves the payment meaningfully.
Now stack the rest of the housing bill on top. Property taxes vary wildly by state, but at a fairly typical 1.1% of home value they add roughly $310 a month, and homeowners insurance commonly adds a low hundreds figure depending on where you live. Before PMI even enters the conversation, this house costs somewhere around $2,400 to $2,500 a month to keep.
Against the $1,983 cap, the verdict is blunt: on $85,000 a year, a $340,000 house at 10% down fails the 28 test, and not by a rounding error. The payment alone nearly exhausts the cap before taxes and insurance say a word. The rule of thumb answer at this salary and rate sits closer to the $270,000 to $300,000 range depending on taxes, which the home affordability calculator will pin down against your actual numbers in about two minutes.
PMI: the fee for being under 20% down
Put down less than 20% on a conventional loan and you pay private mortgage insurance, a monthly fee that protects the lender, not you, until your equity reaches the threshold. As a rule of thumb PMI runs somewhere between 0.3% and 1.5% of the loan balance per year depending on your credit and down payment. On our $306,000 loan, a middling 0.8% rate means about $204 a month, stacked on top of everything above.
PMI is not forever: on conventional loans it drops off as your equity crosses roughly the 20 to 22% mark. But in the early years it is real money buying you nothing, and it belongs in the affordability math from day one. In our example it pushes the true monthly cost of the 10%-down purchase past $2,600, which is now uncomfortably beyond the 36 line too if any other debt exists.
What lenders check vs what you can live with
Here is the uncomfortable part: lenders will often approve debt-to-income ratios well above 36%, sometimes dramatically above it depending on the loan program. So an approval letter is evidence that a computer believes you will probably make the payments, not that the payments leave you a life. The 28/36 rule is deliberately more conservative than the people lending the money, which tells you something about who each standard is protecting.
The other quiet distortion: everything is computed on gross income. Your 401k contributions, health insurance premiums, taxes, childcare, and the fact that you enjoy eating in restaurants are all invisible to the ratio. The mistake I have watched people make, repeatedly, is budgeting the mortgage against the salary number instead of the deposit that actually lands in checking. My rule: run 28/36 for the shopping range, then write the real monthly budget against take-home pay before making an offer. If the second exercise feels tight on paper, it will feel tighter with a roof involved.
The down payment trap
Twenty percent down kills PMI, so the instinct is to scrape to reach it: empty the emergency fund, borrow from the 401k, accept the gift with strings. On this house that is $68,000 down, producing a $272,000 loan and a P&I payment of about $1,719, which is $215 a month lighter plus the $204 of PMI avoided. Real savings, roughly $400 a month.
But a homeowner with no cash reserves is one water heater away from a credit card balance at 24%, and the first year of ownership is famously a parade of surprise expenses. Sometimes the genuinely smart move is 10% down, PMI accepted as a temporary tax, and $20,000 still sitting in savings. Run both versions in the down payment calculator and pick the one that leaves you sleeping, not the one that wins the spreadsheet by $400 a month while your buffer sits at zero.
Should I even buy right now?
The honest final step is refusing to assume the answer. Renting at $1,800 while investing the difference can beat buying the marginal house, especially over a horizon shorter than five to seven years once you count closing costs, maintenance, and the interest-heavy early years of a mortgage where very little principal actually gets retired. The rent vs buy calculator makes that comparison concrete for your city and your timeline, and it is worth running before falling in love with listings.
And when you do move forward, work through the CFPB's home buying hub linked below. It is the one place in this process where the explainers are official, current, and not attached to anyone's commission.
Questions people ask
Keep housing costs under 28% of gross monthly income and all debt payments combined under 36%. The stricter cap wins. It is a conservative rule of thumb, deliberately tighter than what most lenders will approve.
By 28/36, housing gets at most $1,983 a month. At 6.5% over 30 years with taxes and insurance included, that supports roughly a $270,000 to $300,000 purchase depending on your down payment, local tax rate, and other debts.
No. PMI is real money, often a couple hundred dollars monthly, but draining your emergency fund to dodge it trades a known fee for genuine fragility. Keeping cash reserves and accepting PMI temporarily is often the better position.
Gross. Retirement contributions, taxes, insurance, and childcare are invisible to the ratios, which is exactly why an approved payment can still be unaffordable in practice. Budget the payment against your actual take-home pay before committing.
Recurring obligations: the new housing payment, car loans, student loans, personal loans, and credit card minimums. Utilities, groceries, phone plans, and subscriptions are not counted, which is another reason the rule flatters your real budget.
