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28/36 Rule


The 28/36 rule states that your total housing costs should not exceed 28% of your gross monthly income and your total debt payments should not exceed 36%. Following this rule aims to keep borrowers from overextending themselves for housing and other costs.

Also known as:The front-end ratio and back-end ratio, 28/36 mortgage rule, debt-to-income ratio
First Seen:Unknown, but fairly recent term since consumer credit card debt wasn't common until the 1970s, and each lender used their own proprietary standards. With FHA and VA loans, DTI became much more widely used.

The 28/36 mortgage rule is a way to limit the risk that a borrower will default on a loan by specifying that less than 28% of gross monthly income should go toward housing costs, whether that’s rent or a mortgage. This is known as the front-end ratio. Thirty-six percent of gross monthly income should be the upper limit on all debt costs when added together (including housing, even if rent technically isn't debt), also known as the back-end ratio. This leaves 64% of income for all taxes, household expenses, savings and other costs of life.

This rule is often applied to conventional loans, but can be used for any housing situation. Many lenders are likely to follow this guideline, but FHA lenders may be more flexible, as debt-to-income (DTI) ratio can go up to 43% or higher. Generally, your income should be about seven times your debt; 36% is the recommended DTI ratio,

The 28/36 rule isn't a hard-and-fast guideline, but if you follow it when you set your budget for a new housing situation, it can help you get approved for a rental or a mortgage loan. Let's look at why this rule exists and what it looks like for a real family looking to buy a home or change their debt situation.

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Understanding the 28/36 rule

There’s more room to save money for a rainy day if you aren't stuck with large recurring bills to pay your debts. The 28/36 mortgage rule is meant to help families decide when further debt or housing cost obligations would put them in danger of incurring financial risk. Even if you can technically afford a particular home now, if it commands a high percentage of your budget, you don't have much room for error. A job loss, an unexpected medical bill or another financial change can result in no longer being able to make ends meet.

The 28/36 mortgage rule generally assists lenders by limiting the amount of money they should be willing to lend. The rule also allows the lender to assist the buyer, by making it less likely that they will get in over their head, in terms of financial debt. Essentially, the 28/36 rule reduces the risk of a borrower defaulting on the loan.

The 28/36 rule also gives a more accurate picture of your financial health. The front-end ratio should include not only your mortgage or rent payment, but also homeowners insurance, renters insurance, homeowners association (HOA) fees and property taxes. When calculating the back-end ratio, all debts should be factored in, including student debt, credit cards and car loans. This number is often much higher than what we think of when planning our housing costs.

Application of the 28/36 rule

To show a more concrete example, consider a hypothetical budget.

Each partner in a couple earns $3,000 a month in income, for a total gross monthly income of $6,000. Their ideal budget for housing with the 28/36 rule would be $1,650 or less. However, their total monthly debt, including student loans, credit card expenses and car notes, already amounts to 12% of their gross monthly income.

To comply with the 36% component of the rule, they’d need to stick with 24% or less for housing. Luckily, they’re able to find housing for $1,300 a month: about 22% of their gross monthly income. Between their 22% for housing and 34% for total debt, they can stay within the 28/36 rule. If the family has no additional debt, they can take on up to 36% of their gross monthly income in mortgage payments without creating undue risk for the lender.

As you can imagine, these numbers vary widely depending on the person, the stability of their income, whether they carry varying levels of consumer debt and more. This simplified example, however, should help you to start calculating your own current ratios.

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Where does the 28/36 rule come from?

The rule relates to a range of numbers within which mortgage loan underwriters are comfortable approving mortgage loans.

Some lenders will approve loans that put housing costs above the 28%, and others will only approve loans tfor an even lower percentage of the household's monthly income. However, these numbers emerged as typical standards for a mortgage applicant to show that the new loan will not jeopardize their ability to make payments.

What happens if I exceed the 28/36 rule?

If your front-end ratio percentage only slightly exceeds 28%, some lenders may approve the loan. If the percentage exceeds 28% by quite a bit, some of the following factors will help the applicants qualify for a mortgage loan:

  • A large down payment of 20% or more can make it less likely the lender will lose money on the loan in the case of a default, and reduces the amount of total debt.
  • A higher interest rate can be used to absorb some of the risk of borrowing above the 28/36 rule.
  • Having substantial savings or additional assets can make it unlikely for the borrower to rely on current income alone to afford this property.

If you do exceed the 28/36 rule, there are a few things you can do:

  • Create liquid savings. This option may be safer than paying ahead on the mortgage in many cases, since it can earn interest in a brokerage account or high-yield savings account and will be available to pay your monthly mortgage bill in the event of a crisis.
  • Pay off other debt. You could work to pay off other high-interest debt so that your 36% part of the ratio comes down, even if you're likely to have your mortgage or rental costs for the long term.
  • Explore monetization opportunities for your property. If it’s legal and profitable, doing a short-term rental, taking in a long-term tenant or allowing family to live with you in exchange for help with utilities and groceries could make your financial situation more stable.
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