Home Buying Basics: The 28/36 Rule

Let’s talk about something that doesn’t involve spreadsheets, but still helps you keep your finances in check: the 28/36 rule. If you’re in the market for a loan or trying to get a better handle on your financial situation, this rule is your new best friend. And no, it doesn’t involve any complicated math formulas or confusing jargon—just some simple, common-sense guidelines.

SO, WHAT IS THE 28/36 RULE?

At its core, the 28/36 rule is a nifty little guide that tells you how much debt you can handle without breaking a sweat. According to this rule:

• 28% of your gross monthly income should be the max you spend on housing expenses.

• 36% of your gross monthly income is the upper limit for total debt payments, including housing, car loans, credit cards, and any other debts hanging over your head.

Essentially, it’s a way to make sure your expenses don’t spiral out of control, helping you manage your debt-to-income ratio for your mortgage effectively.

WHY LENDERS LOVE THIS RULE?

Lenders use the 28/36 rule to figure out if they should give you a loan. If you’re keeping your debt-to-income (DTI) ratio under control, it tells lenders that you’re not drowning in debt. That’s good news because they’re more likely to give you the thumbs-up when you apply for a loan, especially if you use a DTI calculator to monitor your finances closely.

But here’s the thing: your credit score also plays a part. Even if you’re playing by the 28/36 rule, a less-than-stellar credit score might make lenders a little hesitant to approve your debt-to-income ratio for a home loan.

THE BREAKDOWN: WHAT DOES 28% LOOK LIKE?

Let’s say you earn $5,000 a month before Uncle Sam takes his cut (this is your gross income). If you follow the 28/36 rule, you shouldn’t spend more than 28% of that on housing. In this case, that would mean $1,400 for your mortgage or rent, property taxes, insurance, and any homeowners association (HOA) fees. This ensures your mortgage-to-income ratio stays in check.

If that sounds like a tight squeeze, you’re not alone. But that’s kind of the point—it’s supposed to help you avoid going overboard with your housing costs. Because, let’s face it, a fancy house isn’t worth the stress of eating ramen noodles every day.

TOTAL DEBT: THE 36% CAP

The other side of the rule focuses on total debt. After paying for housing, you’ve got to make sure that all your other debts (like auto loans, credit cards, or student loans) don’t push you past 36% of your gross income. For our example a person making $5,000 a month, that means keeping total monthly debt payments under $1,800, which directly impacts your debt-to-income ratio for mortgage approval.

That extra cushion of $400 (beyond the $1,400 housing cap) is supposed to cover other debt payments. So, if your housing costs are lower than 28%, you get more wiggle room to tackle other loans, making sure your debt-to-income ratio doesn’t exceed recommended levels.

Read Also: What Is a Mortgage Stress Test and How Does It Affect You?

WHAT COUNTS AS HOUSING EXPENSES?

You might be wondering what exactly goes into that 28% limit for housing. It’s not just your mortgage or rent. Lenders typically lump in property taxes, homeowners insurance, and HOA fees. Some lenders may even count your utilities, but that’s less common. This gives a clearer view of how your mortgage-to-income ratio is calculated.

WHAT’S A DEBT-TO-INCOME RATIO, AND WHY SHOULD YOU CARE?

Your debt-to-income ratio (DTI) is how much of your income is going towards debt payments. You can calculate it by dividing your total monthly debt payments by your gross monthly income. This is the golden number lenders use to decide whether to approve your loan. If your DTI is over 36%, it can signal to lenders that you might struggle to take on more debt without risking default. And lenders? They’re not fans of risky business.

SPECIAL CONSIDERATIONS: WHEN GOOD CREDIT SAVES THE DAY

Here’s the twist: if you’ve got a stellar credit score, some lenders might give you a little more flexibility with the 28/36 rule. A higher credit score tells lenders you’re reliable, even if your debt-to-income ratio for a home loan is a tad over the line. Basically, it makes a good impression, and you might get away with bending a rule or two.

THE BOTTOM LINE

The 28/36 rule is like your financial personal trainer, helping you set limits so you don’t overextend yourself. By sticking to 28% for housing and 36% for total debt, you can keep your financial life in good shape. And while lenders use it as part of their decision-making process, following the rule is also a great way to avoid future financial headaches.

So, next time you're eyeing that dream house or thinking about applying for a loan, remember the 28/36 rule—it’s there to help you stay financially fit without breaking a sweat. And don’t forget to track your debt-to-income ratio for your mortgage with a DTI calculator to stay on the right track.