Before you start browsing Zillow, you need to know what lenders actually look at -- and where most first-time buyers get caught off guard.
The 28/36 Rule
Most lenders use the 28/36 rule as a baseline for affordability. The "28" means your monthly housing costs (mortgage principal, interest, taxes, insurance, and any HOA fees) should not exceed 28% of your gross monthly income. The "36" means your total monthly debt payments -- housing plus car loans, student loans, credit cards, and any other recurring debt -- should not exceed 36% of your gross monthly income.
For example, if your household earns $8,000 per month gross, the 28% front-end ratio caps your housing payment at $2,240, and the 36% back-end ratio caps your total debt payments at $2,880. If you already have $500 in monthly debt obligations, your housing budget effectively drops to $2,380 under the back-end ratio.
Debt-to-Income Ratio: The Number Lenders Care About Most
Your debt-to-income ratio (DTI) is the single most important factor in determining how much a lender will approve. Conventional loans typically require a DTI under 43%, though some lenders push to 45% or even 50% with strong compensating factors like a high credit score or substantial reserves.
Keep in mind that DTI uses your minimum payments, not your actual payments. If you pay $500 on a credit card with a $50 minimum, the lender uses $50. But if you carry no balance, it may not count at all.
FHA, VA, and Conventional: Different Loans, Different Rules
Conventional loans typically require 5-20% down, a credit score of 620+, and a DTI under 43-45%. If you put less than 20% down, you will pay private mortgage insurance (PMI), which adds to your monthly cost.
FHA loans allow as little as 3.5% down with a 580+ credit score. They are more forgiving on DTI (up to 50% in some cases), but they require mortgage insurance for the life of the loan if you put less than 10% down.
VA loans (for eligible veterans and service members) require zero down payment and have no PMI requirement. They also tend to have the most competitive interest rates and more flexible DTI limits.
Hidden Costs Most Buyers Miss
- Property taxes: These vary wildly by location. A $400,000 home in Texas might cost $8,000+ per year in property taxes. The same home in Colorado might cost $2,400.
- Homeowners insurance: Required by lenders. Costs depend on location, home value, and coverage level.
- Maintenance and repairs: Budget 1-2% of the home's value annually. On a $350,000 home, that is $3,500-$7,000 per year.
- Closing costs: Typically 2-5% of the purchase price. On a $350,000 home, expect $7,000-$17,500 at closing.
- HOA fees: If applicable, these can range from $100 to $500+ per month and are included in your DTI calculation.
Bottom Line
Start with the 28/36 rule as a baseline, but factor in property taxes, insurance, maintenance, and closing costs before committing. What a lender approves you for and what you can comfortably afford are often very different numbers. Leave room in your budget for the unexpected.