When you take out a mortgage, it’s important for you and your lender to know you can afford the monthly payment without it taking up too much of your income. The 28/36 rule is a common tool you and your lender can use to determine how much mortgage you can afford.
Key Takeaways:
- According to the 28/36 rule, no more than 28% of your gross monthly income should go toward your housing costs, and no more than 36% should go toward paying all your debts.
- The 28/36 rule helps you be sure you can afford your mortgage payments and have enough income left over for the rest of your budget.
- Lenders use the 28/36 rule to determine whether they will approve you for a home loan, but it’s not always a hard-and-fast rule.
Why the 28/36 Rule Is Important
The 28/36 rule states that your housing costs should total no more than 28% of your gross monthly income, and that all your monthly debt payments — including your housing costs — should add up to less than 36% of your gross monthly income.
The rule is intended to make sure you aren’t spending too much of your income on housing or debt payments. If your mortgage and debt payments take up too much of your income, you’ll have less money for other essentials — food, clothing, transportation, utilities, taxes, etc. — creating a situation known as being “house poor.” If you struggle to pay for all your essential needs, the odds increase that you will have to make choices about which bills to pay, and may default on your mortgage.
“This rule is important because it limits the risk of loan default,” says Jeff Rose, a certified financial planner based in Nashville, and founder of the website Good Financial Cents. “This leaves 64% of your income for other expenses, helping maintain financial health.”
Understanding the 28/36 Rule
The numbers mentioned in the 28/36 mortgage rule refer to your debt-to-income ratio, which is calculated by dividing your monthly debt payments by your gross monthly income, and multiplying by 100 to get a percentage.
Which debts you include when calculating the DTI ratio can give you either a front-end ratio or a back-end ratio.
The front-end ratio includes only your monthly housing costs as debt. This is meant as a guide for what percentage of your income should go to mortgage payments. When applying for a mortgage, the lender will use the monthly payment for the loan you’re applying for. Under the 28/36 rule, this calculation should not exceed 28% of your gross monthly income.
The back-end ratio includes the housing costs used in the front-end ratio, plus all your other debts. This includes the monthly minimum payments on your credit cards, auto loans, student loans, etc. The 28/36 rule states this ratio should not exceed 36%.
You can use our free DTI ratio calculator to figure out where your finances stand.
What counts as housing expenses?
When determining your front-end ratio, here are the monthly costs that count as housing expenses:
- Mortgage payment, including principal and interest.
- Homeowner’s insurance.
- Homeowners association fees.
- Private mortgage insurance.
What counts as debt?
The back-end ratio includes the expenses in the front-end ratio, as well as your minimum monthly payments on:
- Credit cards.
- Car loans.
- Student loans.
- Personal loans.
- Alimony and child support (if applicable).
What counts as income?
When it comes to the 28/36 rule, you’ll be using your gross monthly income, which is the amount you earn before taxes and other deductions. This includes your salary or wages, along with any commissions, stock options, dividends and interest, royalty payments, rental income, and any additional self-employment income.
Applying the 28/36 Rule
Let’s take a look at some examples of how to use the 28/36 rule.
Front-end ratio examples
To calculate your front-end ratio, you’ll take your expected monthly housing payment, divide it by your gross monthly income, and multiply by 100.
Let’s say you want to buy a $450,000 house, so you make a 20% down payment and apply for a 30-year fixed-rate mortgage of $360,000 with a 7% interest rate. That’s going to require a monthly mortgage payment of $2,395. If you earn $66,000 per year, you’ll have a gross monthly income of $5,500.
To determine your front-end ratio, we would take that $2,395 mortgage payment, divide it by your $5,500 monthly gross income, and multiply by 100 to get a figure of 44%. That’s higher than the suggested 28% limit, which means you may struggle to afford this mortgage.
If your income is $96,000 per year, you’d have a gross monthly income of $8,000. Instead of buying the $450,000 home, you put an offer on a $400,000 home. To do so, you take out a 30-year fixed-rate mortgage with a 7% interest rate and make a 20% down payment.
In this scenario, you lower your monthly mortgage payment to $2,129. To determine your front-end ratio, you’ll divide that $2,129 by $8,000 and multiply by 100 — leaving you with 27%. That means your front-end ratio is less than 28%, which indicates that you can afford that mortgage.
Back-end ratio examples
To calculate your back-end ratio, you’ll add up all your housing costs and monthly debt payments, divide that number by your gross monthly income, and multiply by 100.
Let’s use the previous example with a $2,129 monthly mortgage payment and $8,000 gross monthly income. Then, we’ll add in these minimum monthly debt payments:
- Auto loan: $200.
- Credit cards: $400.
- Student loan: $100.
Take that total of $2,829, divide by your $8,000 monthly income, multiply by 100, and you get a ratio of 35%. That means your back-end ratio is just under the 36% limit, and you likely can afford this mortgage.
If you had $400 more in credit card debt, your total monthly debt load would increase to $3,229. Your ratio then would be 40%, which exceeds the 36% limit and suggests this mortgage might be out of your budget range.
How the 28/36 Rule Works With Different Loan Types
The 28/36 rule is more of a rule and thumb and less of a hard-and-fast standard that applies to all lenders or loan types. Even with conforming conventional loans, the maximum back-end ratio can be as high as 50% — the 36% limit applies to loans undergoing manual underwriting.
Other loan types have their own limits for front-end and back-end DTI ratios.
Front-End and Back-End DTI Ratio Maximums by Loan Type
| Loan Type | Front-End Ratio | Back-End Ratio |
| Conforming conventional loan | N/A | 50% for loans using automated underwriting. 36% for loans with manual underwriting, though that increases to 45% if the borrower meets certain credit score and reserve requirements. |
| Federal Housing Administration loan | 31% | 43% |
| Veterans Affairs loan | N/A | 41% |
| U.S. Department of Agriculture loan | 29% | 41% |
When You Exceed the 28/36 Rule
The 28/36 rule can be a difficult mark to meet for many aspiring homeowners. Rising home prices and high levels of debt — student loans, for example — can make meeting the 28/36 rule seem unrealistic.
The good news is that lenders consider factors other than the 28/36 rule when approving you for a mortgage — including your credit score, how much you have for a down payment, any financial assets you own, and your income.
“If you’ve got a hefty down payment ready, that can ease things up,” Rose says. “Or, if you’re cool with a higher interest rate, that might work too. Having a nice cushion of savings or other assets also helps.”
Strategies for meeting the 28/36 rule
If you need to improve your front-end and back-end ratios, here are some steps that may help:
- Pay down your debts. Paying off credit cards — or at least paying them down — can reduce your back-end ratio and leave more money in your budget for a mortgage payment.
- Keep saving. Save for a larger down payment and show your lender that you have enough cash reserves to pay your mortgage if there’s an interruption in your income.
- Plan to rent out part of the home. Planningonrenting out a room or other part of the home you’re buying may boost the income part of your ratio enough to afford the mortgage.
“Let’s say you’re already over those limits,” Rose says. “You could beef up your savings — that’s always a smart move. Knocking out other high-interest debts can also help balance things out. And hey, if you can make a few bucks from your property, like renting out a part of it, that’s a bonus for your budget.”
FAQ: What Is the 28/36 Rule for Getting a Mortgage?
Here are answers to some common questions about the 28/36 rule.
Is the 28/36 rule based on gross or net income?
The 28/36 rule is based on your gross monthly income, not your net income. Your gross income is the amount you earn before taxes are taken out, while your net income is the amount you take home after taxes and deductions.
Does monthly debt include utilities or food?
When calculating your DTI, utilities and food expenses are not included as debt.
Do lenders use the 28/36 rule?
Yes. Lenders often use the 28/36 rule when considering whether to approve potential borrowers for a home loan.
The Bottom Line on the 28/36 Rule for Getting a Mortgage
The 28/36 rule is a helpful tool for prospective homebuyers to make sure they’re taking out a mortgage that they can afford with their current income and debt. It’s also a tool that lenders often use to determine whether you’re eligible for a home loan. If your front-end or back-end ratio is slightly above the limits set by the 28/36 rule, that doesn’t mean you can’t get a mortgage. However, staying within these limits can allow you to confidently budget for your future as a homeowner.
