When you're planning to buy a home, knowing your budget is just as important as finding the right property. That's where the 28/36 rule of thumb for mortgages comes into play. This handy formula is widely used in real estate to help you figure out how much you can afford to spend on housing and other debts—giving you a clear picture of what you can realistically handle financially.
If you're thinking about a mortgage, the 28/36 rule works as a guideline to help you stay financially healthy and avoid getting into too much debt while making your homeownership dreams come true.
In this article, we’ll explore this simple rule of thumb for mortgage payment and share tips from a real estate professional.
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What is the 28/36 rule?
The 28/36 rule is a guideline used by lenders to determine how much of your income should go toward mortgage and other debts. It considers your gross monthly income, which is the total amount you earn each month before taxes and other deductions.
It's divided into two parts:
- 28%: This is the maximum portion of your gross monthly income that should be spent on housing expenses. This includes your mortgage payment, property taxes, homeowner’s insurance, and any homeowner’s association (HOA) fees.
- 36%: This represents the maximum percentage of your gross monthly income that should go toward all debt payments combined. This debt-to-income (DTI) ratio includes housing expenses, credit card payments, car loans, student loans, and any other forms of debt.
By sticking to the 28/36 rule, you can get a clearer idea of what you can afford, which helps you avoid the common pitfall of taking on a mortgage that's too large and ensures you have room in your budget for all of life's other expenses.
How the 28/36 rule work
Lenders use the mortgage rule of thumb as a preliminary gauge of financial health; it allows them to determine how much you can realistically afford to borrow without overextending yourself.
DTI ratios are critical in the mortgage approval process because they provide a snapshot of your financial health and risk level. A lower DTI ratio suggests you have a good balance between debt and income, making you a more attractive candidate for a mortgage.
Lenders require a variety of documents and information to make these assessments, including pay stubs, tax returns, and W-2 forms to verify your income. They may also request credit reports, employment history, debt documentation, and assets. When the process is finished, lenders usually share the results of their assessments.
How to calculate the 28/36 rule
If you're curious or anxious to see how your finances stack up before meeting with a lender, you can calculate the 28/36 mortgage rule yourself. Here’s a simple step-by-step:
- Calculate your gross monthly income: This is your total income before taxes and other deductions. If you’re salaried, divide your annual income by 12. For hourly workers, multiply your hourly wage by the number of hours worked per week, then multiply by 52 weeks, and finally divide by 12.
- Calculate your maximum housing expenses (28% threshold): Multiply your gross monthly income by 28%. This will give you the maximum amount recommended for housing expenses, including mortgage payments, property taxes, homeowners insurance, and any homeowners association (HOA) fees. For example, let's say your gross monthly income is $5,000:
- $5,000 x 0.28 = $1,400
- Your maximum housing expenses should not exceed $1,400 per month.
- Calculate your total debt payments (36% threshold): Multiply your gross monthly income by 36%. This figure includes housing costs plus any other debts like car loans, student loans, and credit card payments. Again, imagine your gross monthly income is $5,000:
- $5,000 x 0.36 = $1,800
- Your total monthly debt payments should not exceed $1,800.
In this mortgage rule of thumb example, housing expenses must be kept under $1,400 per month and your total debt payments should stay below $1,800 per month to align with the 28/36 rule.
What if you don’t meet the 28/36 rule?
If your debt-to-income ratio exceeds the 28/36 threshold, it doesn’t necessarily mean you won't qualify for a mortgage. “The 28/36 rule is just one piece of the puzzle, giving buyers a rough idea of what they might be able to afford without stretching themselves too thin,” says Ryan Fitzgerald, owner of Raleigh Realty.
It's crucial to look at the bigger picture. “While lenders certainly consider these ratios, they also look at your overall financial health—your personal financial goals, lifestyle, and local market conditions all play important roles in determining what's truly affordable for you,” Fitzgerald says. “The most relevant factor is finding a home that fits your budget and lifestyle without causing financial stress in the long run.”
Lenders can be surprisingly flexible when it comes to the 28/36 rule—especially if a buyer has other strong financial qualities. “A high credit score, significant savings, or a stable job history can often make up for ratios that exceed the guideline,” Fitzgerald says. “Some loan programs, like FHA or VA loans, are even more lenient with their requirements. I've seen many cases where buyers were approved despite not meeting the exact 28/36 ratio, thanks to their overall financial health and stability.”
Impact of interest rates on the 28/36 rule
Interest rates significantly influence how the rule of thumb for house payment applies to homebuyers. “When rates go up, monthly mortgage payments increase, which can push buyers over that 28% housing expense threshold pretty quickly,” Fitzgerald says. “This means that the same house you could afford when rates were low might become unaffordable when rates rise, even if your income hasn't changed.”
On the flip side, when rates drop, buyers might find they can afford more while still staying within the guidelines. “It's a delicate balance, and that's why I always advise my clients to consider their total financial picture, not just these ratios,” he says.
Is the 28/36 rule realistic?
While the mortgage payment rule of thumb provides a helpful benchmark for determining mortgage affordability, its practicality depends on individual circumstances and the broader economic context.
“It's not always realistic in today's housing market,” Fitzgerald says. “While it's designed to prevent buyers from becoming 'house poor,' the current high home prices and mortgage rates make it challenging for many to stick to this rule.” This is particularly true for those who live in areas with a high cost of living.
Additionally, many people have other significant financial obligations—such as student loans, medical debt, or credit card debt, which can push their debt-to-income ratio beyond the recommended 36%. “In my experience, many successful homeowners have started their journey with ratios slightly higher than these guidelines suggest,” he says.
Individuals with higher income stability or additional sources of income might be able to comfortably handle a higher debt-to-income ratio. On the other hand, those with unpredictable income, such as freelancers or gig workers, might want to aim for even lower ratios to provide a financial cushion.
While the 28/36 rule is a useful starting point, it should be considered alongside your overall financial picture, including current debts, future financial goals, and local market conditions. Flexibility and a tailored approach often provide the best outcomes for buyers navigating today’s complex housing landscape.
Bonus tips for meeting the 28/36 rule
If you don’t meet the mortgage affordability rule of thumb, you shouldn’t give up buying a home. Remember, the 28/36 rule is a guideline, not a hard-and-fast rule. Here are some additional tips to help you afford the home you want:
- Avoid new debts: Try to avoid taking on any new debt before applying for a mortgage, including new credit cards, car loans, or other forms of borrowing that could increase your DTI ratio.
- Boost down payment: “Increase your down payment if possible, which can lower your monthly mortgage payments,” Fitzgerald says.
- Increase your income: Consider taking on a side job or freelance work to boost your income. (You can find great opportunities here on The Muse, hi!)
- Boost your credit score: A higher credit score can help you qualify for better interest rates and loan terms, even if your DTI ratio is slightly above the recommended guidelines. Pay your bills on time, reduce your credit card balances, and avoid opening new credit accounts to improve your score.
- Consider a co-signer: If you have a trusted friend or family member with strong financial credentials, they might be willing to co-sign your mortgage to strengthen your application and potentially help you secure a loan with more favorable terms.
- Explore different loan options: Different types of mortgage loans have varying requirements. For example, FHA loans might have more lenient DTI ratios compared to conventional loans. Research and discuss your options with a lender to find the best fit for your financial situation.
- Adjust the type of home you're looking for: Instead of a single-family home, you might find a townhouse or condo more affordable, which could help you stay within the 28/36 rule. “Consider looking for homes in a lower price range or in up-and-coming neighborhoods where you might get more bang for your buck,” Fitzgerald says.
FAQs
Does the 28/36 rule apply to all types of mortgages, including FHA and VA loans?
Not all types of mortgages strictly adhere to the 28/36 rule. For example, FHA loans often allow for higher debt-to-income ratios, and VA loans have their own guidelines. Check with your lender about the specific requirements for the mortgage you're considering.
How does the 28/36 rule impact refinancing options?
When refinancing, lenders will also use the 28/36 rule to evaluate your ability to manage the new loan. If your DTI ratios exceed these thresholds, you may face challenges securing a refinance, or you might be offered less favorable terms.
What happens if my financial situation changes after I've been approved for a mortgage under the 28/36 rule?
If your income decreases or your expenses increase after being approved for a mortgage, your ability to comfortably afford your home could be impacted. It's crucial to have a financial buffer and consider potential future changes when taking on a mortgage.
Typically, once you're approved and close on the mortgage, the lender won’t revoke the loan if your financial situation worsens, as long as you continue to make the agreed-upon payments. Lenders typically do not track your financial situation after closing, but it's advisable to notify them if you anticipate difficulties making payments.
Are there alternative methods to the 28/36 rule for assessing mortgage affordability?
Yes, some financial advisors suggest different methods, such as the 50/30/20 budget rule or considering your net income rather than gross income. These alternatives can offer a more comprehensive view of affordability based on your specific financial situation.