Affordability: The Real Numbers
Affordability: The Real Numbers
Lenders have strict formulas for how much they'll lend you. Understanding PITI and the 28/36 rule prevents you from being offered a loan you can't comfortably carry.
Key takeaways
- PITI (Principal, Interest, Taxes, Insurance) is the total monthly housing payment lenders use to calculate affordability, not just the mortgage amount.
- The 28/36 rule: front-end DTI (PITI ÷ gross income) should not exceed 28%; back-end DTI (all debt ÷ gross income) should not exceed 36%.
- Lenders routinely approve loans above the 28/36 thresholds; that doesn't make them affordable—it means you're overextended.
- Property taxes, homeowner's insurance, and maintenance are real costs that most first-time buyers underestimate.
- Online calculators that show "max home price" often ignore taxes and insurance, inflating your true buying power.
PITI: The full housing cost
PITI stands for Principal, Interest, Taxes, and Insurance. It's not just your mortgage payment.
Principal and Interest (P&I): This is what most people call "the mortgage payment." A $300,000 loan at 6.5% over 30 years costs roughly $1,896/month. In year 1, about 83% of that goes to interest ($1,574); only $322 reduces principal.
Property Taxes (T): This varies wildly by state and county. Texas (0.6–1.8% annually), Kentucky (0.35%), and New Jersey (2.5%) are poles apart. A $300,000 home in New Jersey at 2.5% costs $625/month in property tax. In Texas at 1%, it's $250/month. Many first-time buyers forget this or assume it's minimal.
Homeowner's Insurance (I): Typically $50–$150/month depending on home value, location, and risk profile. In coastal Florida or California wildfire zones, $200+/month is common.
Full PITI example:
- Home price: $350,000
- Down payment: 20% ($70,000)
- Loan amount: $280,000
- Rate: 6% over 30 years
- P&I: $1,679/month
- Annual property tax (1.2%): $4,200 ÷ 12 = $350/month
- Homeowner's insurance: $120/month
- Total PITI: $2,149/month
Many buyers see the $1,679 mortgage and think "I can afford that" without realizing the true cost is $2,149.
The 28/36 rule
Lenders apply two ratios:
Front-end DTI (housing ratio):
- PITI ÷ Gross monthly income
- Lenders prefer this under 28%
- Example: $2,149 PITI ÷ $7,675 gross monthly income = 28%
Back-end DTI (total debt ratio):
- (PITI + all other debt) ÷ Gross monthly income
- Lenders prefer this under 36%
- Example: ($2,149 + $300 car loan + $200 student loan) ÷ $7,675 = 33%
These are guidelines, not hard stops. Lenders often approve 40%+ back-end DTI if credit is excellent, income is stable, and down payment is substantial. Fannie Mae and Freddie Mac allow up to 43% for qualified borrowers. But higher ratios mean tighter household cash flow and higher default risk in economic downturns.
If a lender offers you a $450,000 loan when your income supports a $350,000 purchase at 28/36 thresholds, the loan is available but not safe. The 2008 crisis showed millions of borrowers what happens when they're approved for more than they can afford.
Gross income, not net
The 28/36 rule uses gross income, not take-home. If you earn $120,000/year gross but take home $78,000 after taxes, the 28% threshold is calculated on the $120,000, not the $78,000. This creates a gap: your actual monthly cash flow may be tight even if your ratios look fine on paper.
Example:
- Gross income: $120,000/year = $10,000/month
- 28% of gross: $2,800/month
- Your PITI: $2,800/month
- Your take-home (after ~35% taxes): $6,500/month
- After PITI, remaining cash flow: $3,700/month for all other expenses
That's still livable, but it assumes no spouse/dependents, stable income, and emergency reserves. A more conservative rule: keep front-end DTI under 25% of net income, leaving more breathing room.
The hidden costs: PMI, HOA, utilities, maintenance
PITI doesn't capture everything:
PMI (Private Mortgage Insurance): If you down-payment less than 20%, lenders charge PMI—typically 0.5–2% of the loan amount annually, added to your monthly payment. A $280,000 loan with 1% PMI costs $2,800/year ($233/month) extra.
HOA Fees: Condo buildings and many newer developments charge HOAs, typically $150–$400/month. Some are $1,000+ in luxury buildings. This is mandatory and non-negotiable.
Utilities: Renters often don't pay for heat in winter or AC in summer if their landlord covers it. As an owner, you do. Add $100–$200/month.
Maintenance: Experts recommend setting aside 0.5–1% of home value annually. On a $350,000 home, that's $1,750–$3,500/year ($146–$292/month). New roof, HVAC failure, plumbing issue—these hit all at once and cost real money.
Actual total housing cost (beyond PITI):
- PITI: $2,149
- PMI (0.75%): $175
- HOA (if applicable): $250
- Utilities: $150
- Maintenance reserve: $200
- Total: $2,924/month
If your PITI is 28% of gross income but your true costs are 10–15% higher, you're above the safety threshold.
Worked example: Qualification and reality
Suppose you and your spouse both work, combined gross income $150,000/year ($12,500/month).
Lender's 28/36 framework:
- 28% front-end: $3,500/month max PITI
- 36% back-end: $4,500/month max (PITI + other debt)
- Existing debt: $300/month car loan + $150/month student loans = $450
- Available for PITI: $4,500 − $450 = $4,050
The lender might approve a PITI of $4,050/month. At 6% over 30 years, this supports a loan of ~$550,000 (assuming 1.2% property tax + $150 insurance = ~$900/month already baked in). You might be offered a $650,000 home with 15% down.
Your actual cash position:
- Gross income: $12,500/month
- Taxes, Social Security, Medicare (~25–30%): −$3,500
- Net income: $9,000/month
- PITI: $4,050
- Other debt: $450
- PMI (1%): $458
- Utilities: $150
- Maintenance: $300
- Remaining for groceries, childcare, insurance, transportation, savings: $1,642/month
That's tight. One job loss, one health event, one major home repair puts you in danger. A safer threshold: target PITI at 20–25% of gross (not 28%), leaving buffer for life's surprises.
The approval ≠ affordability trap
Lenders are generous because they make money on interest, not on your ability to handle hardship. In the subprime crisis (2000–2008), lenders qualified borrowers with stated income (not verified), no money down, and ARM loans that reset after 2 years. The message: approval does not mean affordability.
Get pre-approved, yes, but then sit with a spreadsheet and honestly calculate your true monthly costs. What happens if a household earner loses their job? If rates reset on an ARM? If the roof needs replacement? Build in slack. Target 20–25% front-end DTI, under 35% back-end, and maintain 6+ months emergency reserves.
Flowchart: Affordability decision
Next
You've calculated what you can afford. Now comes the down payment decision—a crucial fork in the path. You can put down 3%, 5%, 10%, 15%, or 20%, each with different trade-offs in costs, monthly payment, and risk.