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. Of course, that doesn't mean that you should spend to the maximum — it's a ceiling.
How do you use the 28% rule? ›
According to the 28/36 rule, your mortgage payment -- including taxes, homeowners insurance, and private mortgage insurance -- shouldn't go over 28%. Let's say your pre-tax income is $4,000. The math looks like this: $4,000 x 0.28 = $1,120. In this scenario, your total mortgage payment shouldn't exceed $1,120.
How do you calculate 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.
Does the 28/36 rule include utilities? ›
Some lenders may include your utilities, too, but this would generally be categorized as contributing to your total debts.
Why is the 28 36 rule so important to understand? ›
According to the 28/36 rule, you'd ideally want your back-end ratio to be 36% or less. The back-end ratio is important because even if your housing payments come to less than 28% of your gross income, you might have other debts that make you a higher lending risk.
What is the 28 36 rule calculator? ›
The 28/36 rule is an easy mortgage affordability rule of thumb. According to the rule, you should spend no more than 28% of your pre-tax income on your mortgage payment and no more than 36% toward total debt obligations. Your mortgage, car payment, credit cards and student loans all count as debt.
How much house can $3,500 a month buy? ›
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 28/36 calculator? ›
28/36 rule example
| What you want to know | Calculation step | The math |
|---|
| If my “front-end” DTI ratio is 28%, what monthly payment can I afford? | Multiply your monthly income by 28% | 6,250 x 0.28 = $1,750 |
| If my “back-end” DTI ratio is 36%, what monthly payment can I afford? | Multiply your monthly income by 36% | 6,250 x 0.36 = $2,250 |
As a rule of thumb, personal finance experts often recommend adhering to the 28/36 rule, which suggests spending no more than 28% of your gross household income on housing. For someone earning $70,000 a year, or about $5,800 a month, this means a housing expense of up to $1,624.
The rule says that you should dedicate no more than 28% of your pretax, or gross, income to costs of housing like a mortgage, and no more than 36% of your pretax income to your costs of housing and debt payments combined.
What is the 28 36 rule quizlet? ›
The 28/36 rule says that as long as your total debt payments are under 36 percent of your gross income then you are not overextended.
What income can be used to qualify for a mortgage? ›
In addition to your monthly income from wages earned, this can include social security income, rental property income, spousal support, or other non-taxable sources of income. Your work history: This helps lenders understand how stable your income is and how likely you are to repay your mortgage.
Does the 28 rule include hoa? ›
The 28/36 rule also gives a more accurate picture of your financial health. The front-end ratio should include not only your mortgage or rent payment, but also homeowners insurance, renters insurance, homeowners association (HOA) fees and property taxes.
How much house can I afford if I make $135000 a year? ›
Applying the 28/36 rule, a $130,000 annual earner should keep housing costs below $3,033. However, there are many other factors besides just your income that shape how much house you can comfortably afford. Credit score: A strong credit score is important when you apply for a home loan.
What is the mortgage payment on $100,000? ›
If your lender offered you a 7% annual percentage rate (APR) on a 15-year loan for $100,000, you could expect your monthly payment — principal and interest — to be about $898. If you had a 30-year loan with a 7% APR, a $100,000 mortgage payment could be about $665 per month.
What is an example of the 20 10 rule? ›
For this example, consider Tom, a hypothetical borrower who has a take-home pay of $50,000 per year. In this example, 20% of Tom's $50,000 income is $10,000. According to the 20/10 rule, Tom's total debt should fall below $10,000.
What is the 28 in the 28 36 rule refers to in the mortgage world? ›
The 28/36 rule says your total housing costs shouldn't exceed 28% of your gross income, and your total debt shouldn't exceed 36%.
What is the 70 20 10 rule of money and how is it used? ›
The 70-20-10 budget formula divides your after-tax income into three buckets: 70% for living expenses, 20% for savings and debt, and 10% for additional savings and donations. By allocating your available income into these three distinct categories, you can better manage your money on a daily basis.
