The 28/36 Rule — Where Every Lender Starts
Before a lender approves your mortgage, they apply two debt-to-income (DTI) ratios. These are the guardrails every bank uses — knowing them lets you calculate your own limit before you set foot in a bank.
| Rule | What it limits | Typical cap |
|---|---|---|
| Front-end (housing ratio) | Monthly housing costs (P&I + tax + insurance + HOA) | 28% of gross monthly income |
| Back-end (total DTI) | All monthly debts combined (housing + cards + loans) | 36–43% of gross monthly income |
Household earns $8,000/month gross. • 28% front-end cap → max housing payment = $2,240/month • 36% back-end cap → max total debts = $2,880/month • If you already pay $500/month on a car loan → housing budget tightens to $2,380
With rates around 6.5–7%, buyers often qualify for less than they expect. Use the mortgage calculator to find your exact number before talking to an agent.
Down Payment: What Each Level Actually Means
20% down is the textbook answer — but most 2026 buyers put down far less. Here's what each threshold actually means for your monthly payment and total cost:
| Down payment | On $400k home | PMI? | Monthly impact |
|---|---|---|---|
| 3–5% | $12k–$20k | Yes (~$150–250/mo) | Higher payment, PMI until 20% equity |
| 10% | $40k | Yes (lower rate) | Saves ~$100–150/mo vs 5% down |
| 20% | $80k | No PMI at all | Saves $150–300/mo, best rate |
PMI on a $350,000 loan costs $1,750–$5,250/year — and it goes to the lender, not toward your equity. If you're close to 20% down, it almost always pays to wait and save more.
The median US down payment in 2025 was 13.6% — not 20%. First-time buyers averaged just 8%. You don't need to wait until you have 20%.
How Rates Change Everything
The rate isn't just a monthly payment difference — it's a total-cost difference that compounds over 30 years. On a $300,000 loan:
| Rate | Monthly P&I | Total interest paid | Extra vs 5.5% |
|---|---|---|---|
| 5.5% | $1,703 | $313,000 | — |
| 6.5% | $1,896 | $382,000 | +$69,000 |
| 7.5% | $2,097 | $455,000 | +$142,000 |
Going from a 680 to 760+ credit score typically cuts your rate by 0.5–1.0%. On a $350,000 loan, that's $30,000–$65,000 in savings over 30 years. Check your credit before you apply.
Hidden Costs Most Buyers Underestimate
The purchase price is just the start. These costs catch first-time buyers off guard:
- Closing costs: 2–5% of the loan ($6,000–$15,000 on a $300k purchase) — lender fees, title insurance, appraisal, prepaid items
- Property taxes: 0.3% (Hawaii) to 2.5% (New Jersey). On a $400k home that's $1,200–$10,000/year
- Home insurance: $1,500–$3,000/year in 2026 (up 20%+ from 2022 due to climate risk repricing)
- Maintenance: budget 1% of home value per year ($3,500/yr on a $350k home)
- Moving costs: $1,000–$5,000 depending on distance
In Florida, Texas, and California, homeowner's insurance has spiked 30–50% since 2022. Some coastal areas now face premiums of $5,000–$15,000/year. Always get a quote before making an offer.
Full Worked Example: $95,000 Household Income
Household income: $95,000/year ($7,917/month gross) 1. Max housing payment (28%): $7,917 × 0.28 = $2,217/month 2. Subtract taxes + insurance ($500 est.) → $1,717 for principal & interest 3. At 6.75% for 30 years → $1,717/month supports a $261,000 loan 4. With 10% down ($29,000) → home price of $290,000 5. Closing costs of ~$8,500 → bring $37,500 to closing Result: comfortably buy in the $270,000–$295,000 range.
Plug your real income and debts into the Home Affordability Calculator to get your personal number in 30 seconds.