Beyond the Math: What Does Affordability Really Mean?
The Correlation Between the 28% and 36% Rules
While our calculator helps you find a monthly payment, lenders look at two specific numbers to decide your risk level. The first is the 28% rule, which focuses strictly on your housing costs. This includes your mortgage, taxes, and insurance. The second is the 36% rule, which represents your total debt. This includes your housing payment plus all other monthly obligations like car loans, student debt, and credit card payments.+2
The gap between these two numbers is 8%. This 8% is the “safety zone” lenders want to see for your non-housing expenses. If your other debts are higher than 8% of your income, you may find that you cannot actually afford a house at the 28% level. In that case, the lender will often lower your maximum home budget to ensure your total debt stays under the 36% cap.
Factor in the Phantom Costs
The Affordability Estimate above covers your mortgage, but it is important to leave breathing room for costs that do not show up on a bank statement. You should consider these three common expenses:
- Maintenance: A solid rule of thumb is to set aside 1% of the home’s value annually for repairs.
- Utility Shifts: Moving from an apartment to a house can often double or even triple your heating and cooling costs.
- Lifestyle Inflation: You may find yourself needing new furniture, a lawnmower, or a fence for the dog shortly after moving in.
Why Max Approval is Not Your Budget
Just because a bank is willing to lend you $500,000 does not mean you should spend that much. Our calculator allows you to play with the numbers until you find your “Sleep Well at Night” figure. This is the payment that lets you keep contributing to your retirement and taking vacations without constant financial stress.