What Is the 28/36 Rule?
I'm going to explain the 28/36 rule directly to you—it's a straightforward method for figuring out how much debt you or your household can handle without overextending. According to this rule, you should limit your total housing expenses to no more than 28% of your gross monthly income, and your overall debt payments—including housing, car loans, and credit cards—shouldn't exceed 36%. Lenders rely on this to decide if they'll give you credit.
Key Takeaways
You can use the 28/36 rule to gauge how much debt is safe based on your income, existing debts, and lifestyle needs. It's also a tool for planning your monthly budget. Sticking to it can boost your odds of getting credit approved, even if you're not applying right now. Keep in mind that underwriters often tweak these percentages—some demand lower ratios, others allow higher ones depending on the situation.
Understanding the 28/36 Rule
When lenders evaluate your credit application, they look at various factors, starting with your credit score, which needs to be in an acceptable range, but that's not all. They also check your income and debt-to-income (DTI) ratio. The 28/36 rule plays a key role here—it's a calculation that assesses your financial health and determines how much debt you can take on safely, considering your income, other obligations, and needs.
The idea is simple: if your debt exceeds these 28/36 thresholds, it's likely too much for you to manage long-term, which could lead to default. Lenders use this as a framework for their underwriting, though they might adjust it—for instance, if you have a strong credit score, they could permit a slightly higher DTI.
Most traditional mortgage lenders stick to a maximum of 28% for household expense-to-income and 36% for total DTI to approve loans. If they're applying the 28/36 rule, expect questions on your application about housing costs and all your debts.
Special Considerations
You need to know that the 28/36 rule is a benchmark most lenders use before approving any credit, so familiarize yourself with it before applying for loans. Every application triggers a hard credit inquiry, which appears on your report. Too many of these in a short time can lower your score and make future credit harder to get.
Example of the 28/36 Rule
Take a household with a $5,000 gross monthly income—if you follow the 28/36 rule, you could allocate up to $1,400 for mortgage and housing expenses. But if you keep housing to $1,000 or 20%, that leaves $800 more for other debts like loans or cards.
What Is Gross Income?
Your gross income is everything you earn from all sources before deductions like taxes, retirement contributions, or benefits. What's left after those is your net income—the amount in your paycheck. Remember, the 28/36 rule uses your gross monthly income for its calculations.
What Is Included in Housing Expenses?
Lenders typically count your monthly mortgage payment, property taxes, homeowners insurance, and any HOA fees as housing expenses. Some might add utilities, but those are usually part of your total debt instead.
How Is My Debt-to-Income Ratio Calculated?
To find your DTI, divide your total monthly debt payments by your gross monthly income. Include payments for mortgage, auto loans, credit cards, personal loans, student loans, and home equity loans in that total.
The Bottom Line
Each lender sets its own limits on housing and total debt during underwriting, which decides if you qualify for a loan. To meet the 28/36 rule, your housing payments—like rent or mortgage—can't exceed 28% of gross income, and all debts combined can't go over 36%. If your numbers are close, a strong credit score might give you some flexibility, so work on improving it if needed.
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