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
The 28/36 rule is based on pretax income. So, for example, say that you make $60,000 per year. This comes to $5,000 per month in pretax income. Under this rule, you should spend no more than $1,800 on combined debt and housing each month.
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? ›
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.
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.
Does the 28% rule still apply? ›
Front-end ratio: No more than 28% of your income
The front-end ratio is how much of your income is taken up by your housing expenses. According to the 28/36 rule, your mortgage payment -- including taxes, homeowners insurance, and private mortgage insurance -- shouldn't go over 28%.
How much house can I afford with a conventional loan? ›
You should aim to keep housing expenses below 28% of your monthly gross income. If you have additional debts, your housing expenses and those debts should not exceed 36% of your monthly gross income. Your max purchase budget is the loan amount that lenders could probably give you based on what you've told us.
How much is 1 point on a loan? ›
One point equals one percent of the loan amount. For example, one point on a $100,000 loan is one percent of the loan amount, which equals $1,000.
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 if I make $70,000 a year? ›
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.
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.
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 get approved for based on income? ›
Using a percentage of your income can help determine how much house you can afford. For example, the 28/36 rule may help you decide how much to spend on a home. The rule states that your mortgage should be no more than 28 percent of your total monthly gross income and no more than 36 percent of your total debt.
How much house can I afford if I make $60000 a year? ›
An individual earning $60,000 a year may buy a home worth ranging from $180,000 to over $300,000. That's because your wage isn't the only factor that affects your house purchase budget. Your credit score, existing debts, mortgage rates, and a variety of other considerations must all be taken into account.
How to use 28/36 rule? ›
The 28/36 rule dictates that you spend no more than 28 percent of your gross monthly income on housing costs and no more than 36 percent on all of your debt combined, including those housing costs.
What is the 28 36 rule for utilities? ›
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.
What is the maximum allowable recurring debt using the 28 36 ratio? ›
To determine the maximum allowable recurring debt using the 28/36 ratio, you first need to find 28% and 36% of the monthly income. For a monthly income of $3,200, 28% is $896 and 36% is $1,152. The maximum allowable recurring debt is the lower of the two percentages.
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.
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? ›
Generally, the most popular rule followed by lenders and borrowers to determine how much your mortgage should be is known as the 28/36 rule. The 28% rule refers to what mortgage lenders call your front-end ratio, which compares your housing costs with your income.
What is the 70 20 10 rule of money and how is it used? ›
The rule states that you should allocate 70% of your income to monthly rent, utility bills, and other essential needs to improve your financial well-being. 20% of your income should go to savings. The remaining 10% can go towards your investments or to debt repayment.
