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With mortgage and refinance rates at modern-day lows, there is renewed interest in the 28/36 rule. In short, the 28/36 rule lets you and your lender know how much house you can safely afford. Here, we'll cover how the 28/36 rule works and how it can help prevent financial hardship.
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. Here's how it 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%.
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.
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:
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.
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 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|
|Energy-efficient FHA loan||33%||45%|
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.
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.
If you're a first-time home buyer, our experts have combed through the top lenders to find the ones that work best for those who are buying their first home. Some of these lenders we've even used ourselves!
We've compiled a first-time home buying guides to help you confidently take the next step to land your best mortgage deal. Check out The Ascent's first-time home buyers guide for essential education.
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.
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