What is the 28/36 rule for home affordability?
Quick insights
- You can use the 28/36 rule to gauge how much home you can afford because the guidelines are based on your specific financial information.
- The rule suggests spending no more than 28% of your gross monthly income on housing costs (including mortgage, taxes and insurance) and no more than 36% on your total monthly debts (such as your credit cards and home, student or car loans).
- Even if you’re not ready to buy a home yet, calculating your 28/36 figures may help you build a more stable homebuying budget and better position yourself to apply for a mortgage.
If you're dreaming about buying your first home, you've probably thought about the financial side. Eventually, you might ask exactly how much you can afford. It can be exciting to picture your own place but stressful to figure out what monthly payment fits your life without leaving you house-poor. Learning about the 28/36 rule can help you set a realistic budget. Let’s break down how this “rule” works for calculating home affordability and see how these examples affect a budget.
What is the 28/36 rule?
The 28/36 rule suggests that a borrower use 28% of their gross income on housing and 36% of their gross income on all their debt. There are two components:
- 28%: No more than 28% of the borrower’s gross income should be spent on housing costs. For homeowners, these costs generally include principal, interest, taxes and insurance (PITI).
- 36%: No more than 36% of the borrower’s gross income should be spent on housing costs and other debt payments. This is also known as your debt-to-income (DTI) ratio.
The 28/36 rule is one of several rules that can be used to assess one’s finances. These aren’t hard rules or requirements that lenders use, but they’re helpful when estimating affordability. Different metrics may be used by lenders and individuals alike to calculate how much of a loan an individual can afford.
Example of the 28/36 rule
A first-time homebuyer earns $6,000 per month. When this individual applies for a mortgage, they provide documentation showing car loan and credit card payments totaling $480 per month (8% of their income). The mortgage they intend to apply for would cost approximately $1,680 per month (28% of their income). Their potential debts (including housing, car and credit card) amount to 36% of their income. Here’s a breakdown:
- Gross income: $6,000 per month
- Existing debts: $480 per month (8%)
- Potential mortgage: $1,680 per month (28%)
- Debts + mortgage: $2,160 total per month (36%)
Why is the 28/36 rule important for homebuyers?
The 28/36 rule might help you understand and organize your finances. Documentation showing your income and debts is usually required when you apply for a mortgage. Some lenders may consider debt-to-income ratios when evaluating mortgage applications, although the 28/36 rule itself is generally used as a budgeting guideline rather than a universal underwriting requirement. Your DTI can influence which loan options, rates or terms you may qualify for, and it’s one of several factors lenders consider when reviewing an application.
Knowing your DTI before you apply for a mortgage loan can give you time to make changes to your financial picture. For example, if your overall debts have crept up, you may want to address them before pursuing a mortgage or take other steps based on your financial situation. Therefore, understanding the 28/36 rule can help you see your finances through the eyes of a lender.
Limitations of the 28/36 rule
The 28/36 rule can provide a general benchmark and help you understand which homes you can afford. However, it may not reflect every detail of your financial situation or the local housing market. Home prices, property taxes, insurance costs and other expenses can vary significantly depending on where you live.
For example, a homebuyer searching in San Francisco, California may encounter very different home prices and housing costs than someone in Indianapolis, Indiana. The 28% guideline for your housing costs may produce very different affordable homebuying options in the two markets. Your other financial obligations matter, too. Expenses like childcare, transportation, savings goals and everyday costs of living aren’t fully captured by the 28/36 rule.
Calculating your own 28/36 figures
Here’s how you can calculate these figures using your own finances.
- Identify your monthly gross income. This is the amount you earn before taxes are taken out or other deductions are made. If you are paid by a regular paycheck, the gross pay is typically printed on the check. If you are receiving income from multiple sources, be sure to total them here.
- Calculate 28% of your gross income. Written simply, the formula is: income x 0.28.
- Calculate 36% of your gross income. Find this number by multiplying your gross income by 0.36.
- Assess your figures. To see if you follow the 28/36 rule, the 28% figure should align with your housing costs. Then, when you add your debts, is the overall total beyond 36% of your gross income?
Why gross income is used for this calculation
Using gross income for 28/36 rule calculations provides a more standardized, verifiable metric. The alternative is your net pay, which varies based on taxes and other potential deductions that differ by individual situation. Using your gross income will help align your own 28/36 calculations with what a lender might evaluate if you apply for a loan.
How to improve your DTI ratio
If your DTI ratio is higher than you'd like, there are several ways you may be able to improve it before applying for a mortgage. The right approach will depend on your personal finances, but these steps can help you evaluate where your monthly income is going and potentially reduce the amount committed to debt:
- Pay down existing debt. Reducing balances on credit cards, personal loans or other debts may lower your required monthly payments and improve your DTI ratio.
- Avoid taking on new debt. Financing a large purchase, opening a new loan or adding another monthly payment could increase your debt obligations before you apply for a mortgage.
- Review your monthly debt payments. Take inventory of recurring obligations such as auto loans, student loans and credit card payments. It’s important to understand how much of your gross monthly income is already going toward debt.
- Consider whether paying off a smaller balance makes sense. If you have a debt that is close to being paid off, eliminating that monthly payment could reduce the amount included in your DTI calculation.
- Check your DTI before applying. Calculating your ratio ahead of time can help you learn where you stand and whether you may want to make financial adjustments before starting the mortgage process.
Keep in mind that DTI is only one factor a mortgage lender may consider when reviewing a mortgage application. Loan requirements and the DTI ratios lenders accept can vary depending on the loan provider, mortgage type and your overall financial profile.
In summary
The 28/36 rule can be a useful starting point when you're preparing to purchase a home and considering how a mortgage payment could fit into your budget. It can also help you understand how housing costs and other debts compare with your gross monthly income. Keep in mind that the rule is a general guideline. Your individual finances, the overall housing market and lender requirements may differ.
Ready to explore your numbers? Use our home affordability calculator to estimate how much you may be able to afford based on your income, monthly debts and other financial information.
