The #1 Homebuying Mistake
Lenders approve loans based on maximum debt-to-income thresholds — not on what lets you live comfortably, save for retirement, or handle emergencies. A pre-approval letter for $500,000 doesn't mean you should spend $500,000. It means the bank believes you can make the payment. That's a very different thing.
The 28/36 Rule
This is the most widely-used guideline for how much housing you can responsibly afford:
28%
Housing ratio
Your total housing payment (PITI: principal, interest, taxes, insurance) should not exceed 28% of gross monthly income.
36%
Total debt ratio (DTI)
All monthly debt payments combined (housing + car + student loans + credit cards) should not exceed 36% of gross monthly income.
DTI Examples (Gross $5,000/month)
| Other Debts/mo | Housing/mo | Total DTI |
|---|---|---|
| $400 (car + student loans) | $1,400 | 36% |
| $800 (high debt) | $1,400 | 44% |
| $400 (car + student loans) | $1,800 | 44% |
How to Calculate Your Real Number
Follow these 5 steps in order.
Calculate your gross monthly income
Use pre-tax income. If self-employed, use a 2-year average from your tax returns (lenders do the same).
$80,000/year = $6,667/month gross
Find your max housing payment (28% rule)
Multiply gross monthly income by 28%. This is your maximum PITI — Principal, Interest, Taxes, Insurance.
$6,667 × 28% = $1,867/month max housing
Check your total DTI (36% rule)
Add all monthly debt payments (car, student loans, credit cards). Total debts + housing should be under 36%.
$6,667 × 36% = $2,400 max total debt. If you have $500/month in debts, housing max drops to $1,900.
Back-calculate your home price
Use a mortgage calculator with your target payment, current rates, expected taxes/insurance to find your max purchase price.
At 7%, $1,867/mo P&I supports roughly a $280K loan — plus your down payment = home price.
Subtract closing costs from your savings
Budget 2%–5% of purchase price in closing costs. This comes out of savings in addition to your down payment.
$400K home: $8K–$20K in closing costs on top of your down payment.
Down Payment Options
| Down % | Loan Type |
|---|---|
| 3% | Conventional (first-time buyer) |
| 3.5% | FHA Loan |
| 10% | Conventional |
| 20% | Conventional — ideal |
| 0% | VA Loan (veterans only) |
PMI — What It Is and When It Ends
Private Mortgage Insurance (PMI) is required on most conventional loans where you put less than 20% down. It's one of the most misunderstood homebuying costs.
PMI protects the lender (not you) if you default.
It costs roughly 0.5%–1.5% of the loan amount per year.
On a $360K loan at 1%, that's $300/month added to your payment.
PMI cancels automatically once you reach 20% equity (by law — Homeowners Protection Act).
You can request cancellation early if you hit 20% equity via appreciation + paydown.
FHA loans have their own version (MIP) that often lasts the life of the loan — a big cost difference.
Key Takeaways
The bank will approve you for more than you should borrow. Their max is not your max.
Apply the 28/36 rule: housing under 28% of gross income, all debt under 36%.
Down payment below 20% means PMI — budget for it and know when it ends.
Always factor in closing costs (2–5% of purchase price) as a separate savings goal from your down payment.