If you’re in the market to buy property, chances are you’ve figured out that for both the lender and the borrower, much of the process is a numbers game. For instance, as the borrower, you’re probably concerned about interest rates, home prices, and how large a mortgage you can comfortably afford. Conforming lenders deal with their own sets of numbers. The critical ones how much money you take in and how much goes out – often serve to determine whether or not to greenlight a loan.

That’s where the 28/36 rule, also called debt-to-income (DTI) ratio, comes into play. Lenders often use the 28/36 rule to calculate the debt a potential borrower can easily take on. Simply put, your mortgage shouldn’t be more than 28 percent of your household’s gross, meaning pre-tax, monthly income, and no more than 36 percent on total debt service, including housing, car loans, and credit cards. Many lenders require a maximum household expense-to-income ratio of 28 percent and a maximum total debt-to-income ratio of 36 percent to approve a loan.

Note that government-backed mortgages offer more leniency, and front-end ratios aren’t even considered with VA loans.

Breaking down the 28/36 rule

When you sit down with lenders, they will calculate two ratios that help determine the monthly mortgage amount you can afford. The front-end ratio makes up the percentage – 28 percent – of your gross monthly income that pays housing expenses. These include but aren’t limited to the following:

  • Monthly mortgage payment
  • Homeowners insurance premiums
  • Property taxes
  • HOA or other homeowners association fees 

The back-end ratio is the percentage – 36 percent – of your gross monthly income that goes toward paying the total sum of your debts, including your mortgage. This is your all-important debt-to-income ratio – your monthly obligations versus your gross (pre-tax) monthly income. In other words, 36 percent is the maximum amount of your gross monthly income that you should spend on recurring debt payments, including the expenses on the front-end ratio, plus any of the following that land on the back end:

  • Home equity loans
  • Credit cards
  • Student loans
  • Alimony
  • Child support
  • Car loans
  • Personal loans

How you can calculate the 28/36 rule

Let’s take a look at a simple way to figure out where you land on the 28/36 rule. For instance, let’s say that you have a gross monthly income of $5,000 and want to find a home with a mortgage of no more than $1,100.

Now, divide that $1,100. monthly mortgage by your gross income of $5,000, and you end up with 0.22. So, that means that your front-end ratio is 22 percent, which lands you under 28 percent.

However, don’t forget that you now have to factor in your back-end ratio. Let’s give you the following monthly payments:

  • $300 utilities
  • $250 car payment
  • $150 credit card payments

That debt totals $700 per month. Now add that $1,100 mortgage payment you’re targeting, and you end up with a total of $1,800.

OK, now divide the $1,800 by your gross monthly income of $5,000, and you get 0.36 as your back-end ratio. So, you have a front-end ratio of 22 percent and a back-end ratio of 36 percent, which puts you in a favorable light for loan approval. 

Can I still get a loan if I break the 28/36 rule?

If you did the math and discovered that your housing payments came to more than 28 percent of your gross income, or you realized that the alimony payments tipped you over the 36 percent mark, don’t despair. You’re not out of the housing market yet. Even if you present a higher lending risk, a lender could still approve your application if you shine in other parts of your financial profile. For instance, do you have a sky-high credit score? (By the way, your DTI doesn’t impact your credit score.) Maybe you can scare up some extra cash for a larger down payment. Or you could simply pay a higher interest rate. First, however, you should always assess your financial situation prudently, keeping your long-term comfort level in mind.

Final thoughts

The 28/36 rule is a valuable tool to help you calculate how much debt your household can assume. Keep in mind that if your debt exceeds the ratio, it’s likely that you could still get a loan, but you need to consider whether you should. Be open with your lender about your expectations, and they can help you find a loan product that won’t break your bank.


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