Lenders do not just look at your salary. They look at how much of your income housing and debts would eat. The 28/36 rule is the classic shortcut for that check: housing costs should stay under 28% of gross monthly income, and total debts under 36%. From those two caps you can work out a borrowing limit.
Step 1: the two caps
Take gross monthly income, before tax. The housing cap is 28% of it, and the total debt cap is 36% of it. Example: $90,000 a year is $7,500 a month. Housing cap = 0.28 x $7,500 = $2,100. Total debt cap = 0.36 x $7,500 = $2,700.
Housing costs here mean the full monthly housing payment: mortgage principal and interest, property taxes, home insurance, and any homeowner association dues. Many beginners count only principal and interest and then wonder why the lender’s figure is lower.
Step 2: apply your existing debts
Subtract your existing monthly debt payments from the 36% cap to get your debt-based housing cap. If you pay $400 a month on a car loan and cards, the debt-based cap is $2,700 – $400 = $2,300. Your real housing cap is the lower of the two caps: min($2,100, $2,300) = $2,100 a month.
If your debts were $800 a month instead, the debt-based cap would be $1,900, which is lower than $2,100, so $1,900 would rule. This is how existing debt quietly shrinks a borrowing limit, and why paying off a car loan before applying can raise it.
Step 3: convert the cap into a loan amount
A monthly payment cap converts into a loan amount with the mortgage formula run backwards. At 6.5% over 30 years, a $2,100 monthly payment supports a loan of about $332,000. That figure covers principal and interest only, so taxes and insurance must fit inside the same $2,100, which reduces the loan a little further in practice.
The conversion is very sensitive to the interest rate. At 5% the same $2,100 supports roughly $391,000; at 8% it supports only about $286,000. That is why a borrowing cap from last year can be badly out of date after a rate move.
What the rule does not cover
The 28/36 rule is a guideline, not a lender’s promise. Some lenders allow higher ratios for strong credit or large deposits, and some apply stricter ones. It also ignores your deposit size, your job stability, and your other spending. Use it as a reality check before house hunting, then get a real pre-approval for the final number. And never stretch to the absolute cap if it leaves no buffer for repairs, rate rises, or income shocks.
From monthly cap to house price
The 28/36 rule gives a monthly payment cap, but house hunting needs a price. Price = loan amount + deposit + costs buffer. With a $332,000 loan supported by a $2,100 monthly cap and an $80,000 deposit, the rough maximum price is $412,000 before purchase costs.
Purchase costs, taxes, and moving expenses come out of the same pot, so the real maximum price is lower. Work backwards: subtract purchase costs and a repair reserve from your total cash, add the loan amount, and that is your ceiling. Shopping above that ceiling with a payment that fits is how buyers end up cash-poor on day one.
Try it faster with the tool
You can follow every step above by hand, but the free Mortgage Affordability Calculator — Your Borrowing Cap From Income, Debts and the 28/36 Rule does the arithmetic for you. Enter your numbers and it gives the answer right away, so you can check your hand calculation or skip straight to the result.
Quick tips
- Housing cap = 28% of gross monthly income.
- Debt cap = 36% minus existing monthly debts.
- Your cap is the lower of the two numbers.