What Is the 28/36 Rule?
The 28/36 rule refers to a common-sense approach used to calculate the amount of debt an individual or household should assume. A household should spend a maximum of 28% of its gross monthly income on total housing expenses according to this rule, and no more than 36% on total debt service. This includes housing and other debt such as car loans and credit cards.
Lenders often use this rule to assess whether to extend credit to borrowers.
Key Takeaways
- The 28/36 rule helps determine how much debt a household can safely take on based on their income, other debts, and lifestyle.
- Some consumers may use the 28/36 rule when planning their monthly budgets.
- Following the 28/36 rule can help to improve your chances of credit approval even if a consumer isn't immediately applying for credit.
- Many underwriters vary their parameters around the 28/36 rule, with some requiring lower percentages and some requiring higher percentages.
Understanding the 28/36 Rule
Lenders use varying criteria to determine whether to approve credit applications. One of the main considerations is an individual's credit score. Lenders usually require that a credit score must fall within a certain range, but a credit score is not the only consideration. Lenders also consider a borrower’s income and debt-to-income (DTI) ratio.
Another factor is the 28/36 rule, which is an important calculation that determines a consumer's financial status. It helps determine how much debt a consumer can safely assume based on their income, other debts, and financial needs. The premise is that debt loads over the 28/36 parameters are likely difficult for an individual or household to sustain. They may eventually lead to default.
This rule is a guide that lenders use to structure underwriting requirements. Some lenders may vary these parameters based on a borrower’s credit score, potentially allowing high credit score borrowers to have slightly higher DTI ratios.
Most traditional mortgage lenders require a maximum household expense-to-income ratio of 28% and a maximum total debt-to-income ratio of 36% for loan approval.
Lenders that use the 28/36 rule in their credit assessments may include questions about housing expenses and comprehensive debt accounts in their credit applications.
Special Considerations
The 28/36 rule is a standard that most lenders use before advancing any credit, so consumers should be aware of the rule before they apply for any type of loan. Lenders pull credit checks for every application they receive. These hard inquiries show up on a consumer's credit report. Having multiple inquiries over a short period can affect a consumer's credit score and may hinder their chance of getting credit in the future.
Example of the 28/36 Rule
Let's say an individual or family brings home a monthly income of $5,000. They could budget up to $1,400 for a monthly mortgage payment and housing expenses if they want to adhere to the 28/36 rule. But it would leave an additional $800 for making other types of loan repayments if they confined their housing expenses to just $1,000 or 20%,
What Is Gross Income?
Your gross income is your income from all sources before any taxes, retirement contributions, or employee benefits have been withheld or deducted. The balance after these deductions is referred to as your "net" income. This is the amount you receive in your paychecks. The 28/36 rule is based on your gross monthly income.
What Is Included in Housing Expenses?
Lenders will typically include in your monthly mortgage payment, property taxes, homeowners insurance premiums, and homeowners association fees, if any, in your housing expenses. Some lenders may include your utilities, too, but this would generally be categorized as contributing to your total debts.
How Is My Debt-to-Income Ratio Calculated?
Your debt-to-income ratio is calculated by dividing all your monthly debt payments by your gross monthly income. Your debt payments include your mortgage, any auto loan(s) and payments toward credit cards, personal loans, student loans, and home equity loans.
The Bottom Line
Each lender establishes its own parameters for housing debt and total debt as a part of its underwriting process. This process is what ultimately determines if you'll qualify for a loan. Household expense payments (primarily rent or mortgage payments) can be no more than 28% of your gross income, and your total debt payments cannot exceed 36% of your income to meet the 28/36 rule.
You might be granted some leeway if you have a very good to excellent credit score, so consider working to improve your score if your 28/36 calculation is borderline.
FAQs
Let's take a look at how this rule works in practice. Consider a couple, each making $60,000, for a total gross income of $120,000 annually (or $10,000 per month). According to the 28/36 rule, they shouldn't spend more than $2,800 on housing monthly and $3,600 on total debt payments.
What are examples of 28 36 rule? ›
If your gross monthly income is $6,000, the 28/36 rule says you can safely spend up to $1,680 on housing and up to $2,160 on all of your bills.
How do you use the 28% rule? ›
To determine how much you can afford using this rule, multiply your monthly gross income by 28%. For example, if you make $10,000 every month, multiply $10,000 by 0.28 to get $2,800. Using these figures, your monthly mortgage payment should be no more than $2,800.
How much house can I afford 28-36? ›
Most financial advisors agree that people should spend no more than 28 percent of their gross monthly income on housing expenses, and no more than 36 percent on total debt. The 28/36 percent rule is a tried-and-true home affordability rule of thumb that establishes a baseline for what you can afford to pay every month.
Does the 28-36 rule include taxes and insurance? ›
According to the rule, you should only spend 28% or less of your gross monthly income on housing expenses, which include your mortgage payment, property taxes and insurance, and homeowners association fees.
Is the 28/36 rule realistic? ›
Broad guidelines like the 28/36 rule do not account for your specific personal circ*mstances. Unfortunately, many homebuyers today do have to spend more than 28 percent of their gross monthly income on housing.
How much house can I afford if I make $70,000 a year? ›
With a $70,000 annual salary and using a 50% DTI, your home buying budget could potentially afford a house priced between $180,000 to $280,000, depending on your financial situation, credit score, and current market conditions. This range is higher than what you might qualify for with more traditional DTI limits.
How much house for $3,500 a month? ›
A $3,500 per month mortgage in the United States, based on our calculations, will put you in an above-average price range in many cities, or let you at least get a foot in the door in high cost of living areas. That price point is $550,000.
How much house can I afford for $5000 a month mortgage payment? ›
How Much House Can You Afford?
| Monthly Pre-Tax Income | Remaining Income After Average Monthly Debt Payment | Estimated Home Value |
|---|
| $3,000 | $2,400 | $79,000 |
| $4,000 | $3,400 | $138,000 |
| $5,000 | $4,400 | $197,000 |
| $6,000 | $5,400 | $256,000 |
4 more rowsOn a $90,000 salary, you could potentially afford a house worth between $280,000 to $320,000, depending on your specific financial situation. This range assumes you have a good credit score and manageable existing debts.
We don't use other line items like utilities or food expenses because, even though they're important, you have discretion over those bills in a way that you can't control a mortgage or credit card payment. The same holds true for the income side of this ledger.
How much house can I afford if I make $36,000 a year? ›
On a salary of $36,000 per year, you can afford a house priced around $100,000-$110,000 with a monthly payment of just over $1,000. This assumes you have no other debts you're paying off, but also that you haven't been able to save much for a down payment.
How much house can I afford if I make $40000 a year? ›
On a $40,000 salary, you could potentially afford a house worth between $100,000 to $140,000, depending on your specific financial situation and local market conditions. While this may limit your options in many urban areas, there are still markets where homeownership is achievable at this income level.
What is the golden rule of mortgage? ›
The 28% / 36% Rule
To use this calculation to figure out how much you can afford to spend, multiply your gross monthly income by 0.28. For example, if your gross monthly income is $8,000, you should spend no more than $2,240 on a monthly mortgage payment.
How much is considered house poor? ›
The 28% rule is one rule of thumb that advises not spending more than 28% of your gross monthly income on your mortgage payment. If your monthly mortgage expenses indeed this percentage, the odds of you being house poor may go up considerably. Consider shopping for a home that costs less than your preapproved amount.
Is 40% of income on a mortgage too much? ›
Is 40% of income on a mortgage too much? Spending 40% of your total income on your mortgage is probably too much — most mortgage lenders will either not approve your application or charge you a very high interest rate.
What does the lender mean when they state they are using a 28 36 qualifying ratio? ›
Most lenders prefer that you spend no more than 28% of your gross monthly income on PITI payments (the housing expense ratio), and no more than 36% of your gross monthly income on paying your total debt (the debt-to-income ratio). For this reason, the qualifying ratio may be referred to as the 28/36 rule.
How to calculate 28% of income? ›
Once you have your gross income, multiply that by 0.28 to find the maximum amount you should spend on housing, including your mortgage, taxes, and insurance. You'll also multiply your gross income by 0.36 to find the maximum amount you should spend on debt.
What is the golden rule for mortgage payments? ›
According to the commonly used 28/36 rule, no more than 28% of your pre-tax monthly income should go toward your mortgage payment (including property taxes, homeowners insurance, and mortgage insurance). The 25% rule states your monthly payment should not exceed 25% of your post-tax monthly income.
What is the 28 36 rule for Ramit? ›
Maximum household expenses shouldn't exceed 28% of your gross monthly income. This includes everything within your home mortgage. Total household debt shouldn't exceed more than 36% of your gross monthly income. This is also known as your debt-to-income ratio.
