Before you dive into the house hunt, having a good grasp of your budget is crucial — specifically, how much you can afford to pay monthly on your mortgage payment.
There are several ways to measure 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.
In this article:
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 how much you can spend on a home. The rule says you shouldn't spend 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 minimum, and any other debt you pay monthly.
Remember that “housing payments” for the 28/36 rule refers to costs that are part of your monthly mortgage payment, such as 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 is only a general rule, however, and many lenders allow borrowers to exceed these thresholds and still qualify for a loan.
Learn more: The best mortgage lenders for first time home buyers
The 28/36 rule is easier to understand with an example. Say you and your spouse make $120,000 a year – or $10,000 a month in gross income (before tax).
Under rule 28/36, you could set aside for:
-
$2,800 per month on your monthly mortgage payment (0.28 x $10,000 = $2,800)
-
$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 are working with. For example, with these thresholds and an estimated mortgage rate of 6.75%, you could expect to afford a house of around $450,000.
Dig deeper: What percentage of your income should go towards a mortgage?
The 28/36 rule is another way to break down your debt-to-income ratio, or DTI – a reflection of how much of your monthly income your debts are taking up. To calculate your DTI, divide your gross monthly debts (before tax) by your gross monthly income, as in the example above.
The DTI plays a big part in your ability to qualify for a loan, and mortgage lenders usually look at two factors: your front-end ratio and your back-end ratio.
Your DTI front end ratio is the amount of income your mortgage payment accounts for. Your debt ratio indicates your total debt payments in relation to your income. (With the 28/36 rule, the “28” is the front-end DTI, and the “36” is the back-end one.)
Read more: How much money do I need to buy a house?
If you're not seeing the numbers you like when breaking down your debt-to-income ratio or you're worried about qualifying for a loan based on the 28/36 rule, then things you can do to help your case.
-
Pay down your debts: The fewer debt payments you have each month, the more money you have that can be spent on a mortgage payment.
-
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, taking on a side gig, offering consulting or freelance work, or getting a second job.
-
Delays in buying a home: Waiting to buy a home for a while could also help. This could give 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.
-
Customize your home search: If your current 28/36 numbers aren't enough to allow you to buy a home in your ideal neighborhood, you may be looking for creative solutions – like buying a condo or co-op, looking in more rural communities, or shopping for a smaller home.
-
Bring in a fellow buyer: If you can bring in another buyer (and their monthly income), it could improve the numbers and sway things in your favor. Make sure it's someone you trust financially, especially if both names are on the loan documents.
Talking to a loan officer or financial adviser 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 probably afford a monthly mortgage payment of $2,800 and total debts of $3,600, 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 taxes. Under the 28/36 rule, you can usually afford a home with a down payment of 28% or less of your gross monthly income and total monthly debt payments (including your mortgage) of 36% or less. d monthly income.
The 28/36 rule is another way of stating the DTI, or debt-to-income ratio. The “28” refers to your front-end DTI, which is how much of your monthly income goes towards 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 towards all your debts.
This article was edited by Laura Grace Tarpley.