A lender may approve you for far more than you should borrow. The amount you can afford depends on your income, your other debts and how much room you want in your budget. The most widely used starting point is your debt-to-income ratio, or DTI.

What Is Debt-to-Income?

DTI compares your monthly debt payments with your gross monthly income. There are two versions:

  • Front-end ratio: housing costs divided by gross income. Housing includes the loan payment, property taxes, home insurance and any association fees.
  • Back-end ratio: all monthly debt payments divided by gross income. It includes housing plus car loans, student loans, credit card minimums and other debts.

A traditional guideline, the 28/36 rule, suggests keeping the front-end ratio at or below 28% and the back-end ratio at or below 36%. Lenders in some countries allow higher ratios, but higher ratios leave less room for surprises.

A Worked Example

Your gross income is 6,000 a month, and you have 400 a month of other debt payments.

  • Front-end limit: 28% × 6,000 = 1,680 for total housing costs.
  • Back-end limit: 36% × 6,000 = 2,160 for all debt, which leaves 2,160 − 400 = 1,760 for housing.

The lower of the two applies, so your housing budget is 1,680 a month.

From Budget to Loan Size

Housing costs are more than the loan payment. Suppose property tax and insurance together are about 450 a month. That leaves 1,680 − 450 = 1,230 for principal and interest.

At a mortgage rate of 6.5% over 30 years, each 1,000 borrowed costs about 6.32 a month. So 1,230 supports a loan of about 1,230 ÷ 6.32 × 1,000, which is roughly 194,600. Add your deposit to get the maximum home price. With a 40,000 deposit, that would be about 234,600.

Change the interest rate, and the answer moves a lot. At 5.5%, the same 1,230 supports a loan of about 216,600. At 7.5%, only about 175,900. That is why affordability changes with every rate move. Our mortgage payment guide explains the formula.

Why the Guideline Is Only a Start

  • It uses gross income, but you spend net income. If your taxes are high, 28% of gross is a bigger bite of what you take home.
  • It ignores your other goals, such as saving for retirement, children or travel.
  • It does not include maintenance, which is often around 1% of the home's value each year.
  • Your job may be less secure, or your income uneven.
  • Utilities and commuting costs differ between locations.

Stress Test Your Budget

Before you commit, ask what would happen if:

  • Your rate rose by two percentage points when a fixed period ends.
  • Your income dropped by 20% for six months.
  • A major repair cost one year of savings.

If a scenario would break your budget, consider a lower price, a larger deposit or a longer saving period.

Ways to Improve Your Ratio

  • Pay down small debts, which raises your capacity at once. Clearing a 400 car loan would raise the back-end limit by 400.
  • Increase your deposit, which reduces the loan and often the interest rate.
  • Improve your credit, which can qualify you for a lower rate.
  • Add a second income to the application if you have one, remembering that you share the risk.

Renting vs Buying

Affordability is only part of the question. Our guide on renting versus buying shows how to compare the full cost.

What to Do This Week

Take your gross monthly income, multiply by 0.28, and subtract tax and insurance estimates to find the loan payment you can afford. Then divide by the payment per 1,000 for your expected rate. The EMI Affordability calculator does the same steps for any loan.