Homebuyers

The 28/36 Rule for Mortgages: Why You Need to Understand These Numbers Before Buying a Home

When you’re on a tight budget, you need to be careful not to overextend yourself by buying more home than you can afford.

Lenders often use the 28/36 mortgage rule to ensure you can afford a home. You can also use this rule to set your own budget before you begin home shopping.

“The basic idea behind the mortgage qualification rule is that housing costs need to be under 28% of the gross income, while total debt needs to be under 36%,” said Sain Rhodes, a real estate expert at Clever, a national brokerage.

But as home prices remain high and wages remain stagnant, this is becoming difficult for many prospective buyers.

Below, we’ll cover what the 28/36 rule is, why it matters when buying a home, and guidelines for setting a realistic homebuying budget.

What is the 28/36 rule, and why does it matter?

The 28/36 rule is a guideline lenders use to evaluate whether you can comfortably afford a home. The two numbers refer to two separate thresholds:

• Your monthly housing costs shouldn’t exceed 28% of your gross monthly income. This is called the front-end ratio.
• Your total monthly debt obligations shouldn’t exceed 36% of your gross monthly income. This is called the back-end ratio or, more often, the debt-to-income ratio (DTI).

Note: Your gross monthly income is what you are paid each month before any money is taken out of your paycheck for taxes, health insurance, or retirement contributions.

The point of this rule is to ensure you don’t overextend yourself financially. If your mortgage payment and other debts take up too much of your income, there’s a higher risk you’ll fall behind on payments, which lenders (and you!) want to avoid.

However, the 28/36 rule is not a hard-and-fast, legal requirement. It’s simply one way that lenders determine your eligibility. It’s also a tool you can use to make your own homebuying budget before applying for a mortgage preapproval.

Often, there is some wiggle room, especially if you have strong credit, substantial savings, or a large down payment.

Some loan programs, including certain Federal Housing Administration (FHA), U.S. Department of Veterans Affairs, U.S. Department of Agriculture, and Conventional loans, allow higher DTIs, instead of 36%.

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All the housing costs in the front-end ratio (28%)

The front-end ratio of the 28/36 rule specifically examines housing costs. When you purchase a home, your recurring housing expenses should account for no more than 28% of your income.

Most of these expenses are built into one monthly mortgage payment, including:

• The principal balance and interest accrued
• Property taxes (paid into an escrow account)
• Homeowners insurance (paid into an escrow account)
• Private mortgage insurance (PMI), if applicable

If you’re purchasing a home in a neighborhood with a homeowners association (HOA), you should account for HOA dues as well.

This does not include utility, internet, home security, or other bills.

Debts that determine the back-end ratio (36%)

The back-end ratio of the 28/36 rule looks at your total debt-to-income ratio. That means it includes your monthly housing expenses, but also your other recurring debts:

• Housing expenses (the 28%)
• Student loan payments
• Car payments
• Credit card minimum payments
• Other installment loan payments (e.g., personal loans, medical payment plans, I.R.S. installment agreements)

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What to do if the 28/36 rule restricts your budget

Given today’s home prices and mortgage rates, it can be challenging to find a home with a monthly payment that fits within the 28/36 guidelines. But that doesn’t mean you’re out of options.

Get creative with your income when buying a home

For starters, your income isn’t only traditional wages from an employer. Think about all the ways you make money, including government benefits and revenue from a side hustle.

“I’ve had many self-employed, contract, and gig economy workers [as clients],” said Rhodes. “I’ve even had a rideshare driver document 18 months of income to obtain a mortgage approval.”

In some cases, however, lenders may not consider that income for a Conventional loan. And if contract work (1099) is your only source of income, you may need a non-conforming mortgage (with a higher rate) instead.

Reduce your debts when you’re looking for a home

Another option if your budget is limited by the 28/36 mortgage rule is to reduce your monthly debt obligations.

Try to wipe out high-interest credit card debt, pay down your auto loan, or consolidate or refinance multiple student loans into one loan with a lower monthly payment.

Reduce housing expenses

Your third and final option: Lower your monthly housing costs, without forcing yourself to buy a lower-priced home. You can do this by:

• Shopping in neighborhoods with lower property taxes
• Saving for a large enough down payment to avoid PMI
• Shopping around to get the best rates on home insurance (try bundling with your car insurance for a discount)
• Trying to increase your credit score and paying down your debt to become eligible for lower mortgage interest rates

Set your own home budget

The 28/36 rule is helpful when calculating your budget, but it’s still only numbers on paper. Just because the calculation says you can afford a higher-cost home doesn’t mean you have to spend that much.

Take the time to assess your overall situation and answer the following questions:

• Do I have an established emergency fund?
• Will I be able to save for retirement if I buy a more expensive home?
• How stable is my job?
• Is there wiggle room in my budget for higher utility bills (especially for larger or older homes) and maintenance and home repairs (especially for fixer-uppers)?

Depending on your answers to those and similar questions, it could make sense to spend even less than the 28/36 rule (or your mortgage preapproval letter) says you can afford.

“I had a client who was approved for a $480,000 home but decided to purchase a $380,000 home to ensure her emergency savings remained robust and her children’s college plans remained flexible,” said Rhodes.