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What Is the 28/36 Rule and How Does It Affect My Mortgage?

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Dana George
By: Dana George
Dana George
Dana George
Writer

Dana George has a BA in Management and Organization Development from Spring Arbor University. For more than 25 years, she has written and reported on business and finance, and she's still passionate about her work. Dana and her husband recently moved to Champaign, Illinois, home of the Fighting Illini. And though she finds the color orange unflattering on most people, she thinks they'll enjoy Champaign tremendously.

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You want to buy a home but don't want to get in over your head. The 28/36 rule helps you do that by letting you (and your lender) know how much house you can afford. Here, we'll break down the 28/36 rule, help you understand how it works, and illustrate how it can keep you out of financial trouble.

What is the 28/36 rule?

The 28/36 rule is a guide that helps mortgage lenders determine how large a mortgage you can afford. It's based on two calculations: a front-end and a back-end ratio.

How the 28/36 rule works

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%.

Ideally, by sticking to the 28/36 rule, you will have enough money for debt repayment and to build a healthy savings account that can get you through tough times.

Back-end ratio: No more than 36% of your income

The back-end ratio is all of your expenses compared to your income. Lenders prefer your expenses stay under 36% of your income. This could include:

  • Mortgage payments
  • Child support
  • Alimony
  • Homeowners association fees
  • Car loan
  • Credit card payments
  • Other expenses

An example

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. If lenders see that your monthly payment is over 28%, they worry you'll have trouble making payments. In short, they want to be sure your annual income is more than enough to cover your mortgage payment even if things go south.

To figure out your back-end debt ratio, multiply your monthly gross income by your total monthly debt payments.

If your income is $4,000, the math looks like this: $4,000 x 0.36 = $1,440.

According to the 28/36 rule, your total monthly debt should be no more than $1,440.

A caveat

One quirk of the 28/36 rule is that any debt scheduled to be paid off in less than 10 months is excluded from the back-end calculation. For example, if you're paying child support until your child turns 18 and that child's 18th birthday is two months away, that fixed expense will not be included in your total monthly debt.

The 28/36 rule for different loan types

The 28/36 rule applies only to conventional loans. Here is a comparison of front-end and back-end income ratios for different loan types:

Loan Type Front-End Ratio Back-End Ratio
Conventional Loan 28% 36%
FHA loan 31% 43%
VA loan N/A 41%
USDA loan 29% 41%
Energy-efficient FHA loan 33% 45%

Why is the 28/36 rule important for mortgages?

The 28/36 rule benefits both the lender and the borrower. All lenders, including mortgage lenders for poor credit, want to lend money to someone who earns more than enough to make the mortgage payments and cover all their other monthly obligations.

How the 28/36 rule helps you as a buyer

The 28/36 rule gives you a sense of how much you can afford to spend without stretching your finances to the breaking point. Whether you've purchased a dozen homes over your lifetime or you're working with a lender that specializes in mortgages for first-time home buyers, the ratio helps protect both you and the lender.

Forget thinking about where you want to live -- focus on how you want to live. Do you want your mortgage payment to eat up a huge chunk of your monthly income, or do you want extra funds to do the things you enjoy? If you're wondering "How much house can I afford?" the 28/36 rule can help.

FAQs

  • The 28/36 rule is a calculation that helps you know how large a mortgage you can afford. Lenders want your housing costs to be 28% or less of your income, and for all your expenses to be under 36% of your pay.

  • The 28/36 rule helps you figure out how much you can afford to borrow and prevents you from getting in too deep.