Housing reading path: (1) This page — what lenders allow (DTI, 28/36, PMI, closing costs). (2) How Much House Is Too Much? — your comfort ceiling below the bank’s max. (3) Down Payments: 5%, 10%, or 20%? — cash-up-front tradeoffs. Compare paths with Rent vs. Buy.
How lenders determine what you can afford
Lenders look primarily at your debt-to-income (DTI) ratio. They calculate your front-end DTI — housing costs divided by gross monthly income — and your back-end DTI — all monthly debt payments divided by income. Most conventional loans want the front-end under 28% and the back-end under 36%.
The 28/36 rule explained
The 28/36 rule says no more than 28% of your gross income should go to housing (mortgage, taxes, insurance, HOA), and no more than 36% should go to all debt payments combined (including housing). On a $7,000 monthly gross income, that means a maximum of about $1,960 for housing and $2,520 for all debt.
Down payments: how much do you need?
The 20% down payment is a myth for many buyers. FHA loans accept 3.5% down, and conventional loans often accept 3-5%. But putting less than 20% down triggers private mortgage insurance (PMI), which can cost 0.5-1.5% of the loan annually until you reach 20% equity. PMI protects the lender, not you.
Closing costs: the upfront surprise
Closing costs range from 2% to 5% of the home's purchase price. On a $350,000 home, expect to pay $7,000 to $17,500 in closing costs. These cover origination fees, appraisal, title insurance, escrow deposits, property taxes, and recording fees. These are due at closing, on top of your down payment.
Hidden ownership costs that surprise new buyers
Beyond the mortgage, homeowners pay property taxes (typically 1-2% of home value annually), homeowners insurance, HOA fees, maintenance (budget at least 1% of home value per year), and utilities that tend to be higher than in apartments. A $350,000 home can easily carry $800-1,200 per month in non-mortgage costs.
How to calculate what you can truly afford
- Multiply your gross monthly income by 0.28 for the maximum housing payment.
- Subtract estimated property taxes, insurance, and HOA from that number to find the max mortgage payment.
- Factor in maintenance costs — don't assume the mortgage payment is the full picture.
- Make sure you have a separate emergency fund after closing — a major repair on day one should not break you.
// Glossary Highlights
- Mortgage — a loan used to purchase a home, typically repaid over 15 or 30 years.
- Debt-to-income ratio — your total monthly debt payments divided by your gross monthly income.
- Interest rate — the cost of borrowing money, expressed as a percentage.
- Emergency fund — cash set aside for unexpected expenses, ideally 3-6 months of living costs.
- Net worth — the value of everything you own minus everything you owe.
// FAQ
Q: What is the 28/36 rule?
A: Housing costs should not exceed 28% of gross income, and total debt payments should not exceed 36%. This is a guideline most conventional lenders follow.
Q: Do I really need a 20% down payment?
A: No. Many loans accept 3-5% down, but less than 20% usually requires PMI, adding a monthly cost until you reach 20% equity.
Q: What are closing costs?
A: Fees paid at settlement, typically 2-5% of the purchase price. They cover origination fees, appraisal, title insurance, and other charges due at closing.
// Key Takeaways
- Lenders use DTI ratios, not the price tag, to decide what you can borrow.
- The 28/36 rule keeps your housing and total debt payments at a manageable level.
- PMI is required when you put less than 20% down and adds significant monthly cost.
- Budget at least 1% of the home's value annually for maintenance and repairs.
// Next Steps
Run real numbers with the Mortgage Calculator. Then build a realistic monthly plan with the Budget Planner.
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Educational information only — not personalized financial, tax, insurance, or investment advice. Disclaimer · Privacy.
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