Before you dive into the house hunt, having a good handle on your budget is crucial — specifically, how much you can afford to pay monthly on your mortgage payment.
There are several ways to gauge this, but one of the most popular strategies is called the “28/36 rule.” Here’s how the 28/36 rule can help you determine your price range for a house.
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Learn more: How much house can I afford? Use the Yahoo Finance home affordability calculator.
The 28/36 rule is a common guideline for determining what you can spend on a home. The rule says you should spend no more than 28% of your gross monthly income on housing (your monthly mortgage payment) and a maximum of 36% on all your debts. This would include your mortgage payment, student loan payment, car payment, credit card minimums, and any other debt you pay off monthly.
Remember that “housing payments” for the 28/36 rule refer to costs that make up your monthly mortgage payment, such as the principal, interest, property taxes, and homeowners insurance. It does not include other housing costs, such as occasional repairs.
Mortgage lenders also use the 28/36 rule to evaluate your ability to make monthly payments when you apply for a mortgage loan. It’s just a general rule of thumb, though, and many lenders allow borrowers to go beyond these thresholds and still qualify for a loan.
Learn more: The best mortgage lenders for first-time home buyers
It’s easiest to understand the 28/36 rule with an example. Let’s say you and your spouse make $120,000 per year — or $10,000 monthly in gross (pre-tax) income.
Under the 28/36 rule, you could allot for:
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$2,800 per month on your monthly mortgage payment (0.28 x $10,000 = $2,800)
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$3,600 per month on your total debt payments (0.36 x $10,000 = $3,600).
You could then use a mortgage calculator to determine what home-buying budget you’re working with. For example, with these thresholds and an estimated mortgage rate of 6.75%, you could expect to afford a house of about $450,000.
Dig deeper: What percentage of your income should go toward a mortgage?
The 28/36 rule is another way of breaking down your debt-to-income ratio, or DTI — a reflection of how much your monthly income your debts take up. To calculate your DTI, divide your gross (pre-tax) monthly debts by your gross monthly income, like in the example above.
DTI plays a major role in your ability to qualify for a loan, and mortgage lenders typically look at two factors: your front-end ratio and back-end ratio.
The front-end ratio of your DTI is the amount of income your mortgage payment accounts for. Your back-end ratio details your total debt payments in relation to your income. (With the 28/36 rule, the “28” is the front-end DTI, while the “36” is the back-end one.)
Read more: How much money do I need to buy a house?
If you’re not seeing numbers you like when breaking down your debt-to-income ratio or are worried about qualifying for a loan based on the 28/36 rule, there are things you can do to help your case.
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Pay down your debts: The fewer debt payments you have each month, the more expendable cash you have for a mortgage payment.
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Increase your income: A higher income means a lower DTI and an easier chance of qualifying for a mortgage. You could increase your income by asking for a raise, taking on more hours, adopting a side gig, offering consulting or freelance work, or getting a second job.
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Delay buying a home: Waiting to buy a home for a bit could help too. This might allow you more time to reduce your debts, get a promotion at work, or make other changes that could help, such as boosting your credit score.
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Adjust your home search: If your current 28/36 numbers aren’t enough to allow a home purchase in your ideal neighborhood, you might look for creative solutions — like buying a condo or co-op, looking in more rural communities, or shopping for a smaller home.
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Bring in a co-buyer: If you can bring in another buyer (and their monthly income), it could improve the numbers and sway things in your favor. Just ensure it’s someone you trust financially, especially if both names will be on the loan documents.
Talking to a loan officer or financial advisor can also help. They can provide personalized guidance based on your specific home-buying goals and finances.
Dig deeper: Is now a good time to buy a house?
The 28/36 rule says that you should spend a maximum of 28% of your gross monthly income on housing (your monthly mortgage payment) and no more than 36% on all your debts.
Using the 28/36 rule, you could likely afford a $2,800 monthly mortgage payment and $3,600 in total debts, which includes your mortgage, car, student loans, credit card, and other debt payments.
The 28/36 rule is based on gross income — meaning your income before paying taxes. Under the 28/36 rule, you can typically afford a home with a payment that’s 28% or less than your monthly gross income and total monthly debt payments (including your mortgage) that equal 36% or less of your monthly income.
The 28/36 rule is another way of stating DTI, or debt-to-income ratio. The “28” refers to your front-end DTI, which is how much of your monthly income goes toward housing costs (ideally no more than 28% of your monthly income). The “36” refers to the ideal back-end DTI — or how much of your monthly income your total debts make up, including your mortgage payment, car payment, student loan payment, and other debts. According to the 28/36 rule, no more than 36% of your monthly income should go toward all your debts.
This article was edited by Laura Grace Tarpley.
