The 28/36 rule of thumb is a mortgage benchmark based on debt-to-income (DTI) ratios that homebuyers can use to avoid overextending their finances. Mortgage lenders use this rule to decide if they’ll approve your mortgage application.
Here’s how the 28/36 rule of thumb works, as well as what it includes and excludes, plus example calculations and some caveats for using the rule.
- The 28/36 rule of thumb for mortgages is a guide for how much house you can comfortably afford.
- The 28/36 DTI ratio is based on gross income and it may not include all of your expenses.
- The rule says that no more than 28% of your gross monthly income should go toward housing expenses, while no more than 36% should go toward debt payments, including housing.
- Some mortgage lenders allow a higher debt-to-income ratio.
- Lowering your credit card debt is one way to lower your overall DTI.
What Is the 28/36 Rule of Thumb for Mortgages?
When mortgage lenders are trying to determine how much they’ll let you borrow, your debt-to-income ratio (DTI) is a standard barometer. The 28/36 rule is a common rule of thumb for DTI.
“The 28/36 rule simply states that a mortgage borrower/household should not use more than 28% of their gross monthly income toward housing expenses and no more than 36% of gross monthly income for all debt service, including housing,” Marc Edelstein, a senior loan officer at Ross Mortgage Corporation in Detroit, told The Balance via email.
It's important to understand what housing expenses entail because they include more than just the raw number that makes up your monthly mortgage payment. Your housing expenses could include the principal and interest you pay on your mortgage, homeowners insurance, housing association fees, and more.
How Does the 28/36 Rule of Thumb Work?
So, how do mortgage lenders use the 28/36 rule of thumb to determine how much money to lend you?
Let’s say you earn $6,000 a month, before taxes or other deductions from your paycheck. The rule of thumb states that your monthly mortgage payment shouldn’t exceed $1,680 ($6,000 x 28%) and that your total monthly debt payments, including housing, shouldn’t exceed $2,160 ($6,000 x 36%).
“A mortgage lender may use this guideline … to gauge or predict that you’ll be able to take on a certain monthly mortgage payment for the foreseeable future,” Andrina Valdes, COO of Cornerstone Home Lending in San Antonio, told The Balance by email. “The 28/36 rule answers the question: How much house can you afford to buy?”
The rule of thumb should be something you calculate before you start shopping for homes, as it gives you an accurate estimate of how much home you can afford.
How to Calculate Debt-to-Income Ratio
Calculating your debt-to-income ratio isn't difficult. The first thing you need to do is determine your gross monthly income—your income before taxes and other expenses are deducted. If you are married and will be applying for the home loan together, you should add together both your incomes.
Next, take the total and multiply it first by 0.28, and then by 0.36, or 0.43 if you're angling for a qualified mortgage. For example, if you and your partner have a combined gross monthly income of $7,000, it would be broken down like this:
- $7,000 x 0.28 = $1,960
- $7,000 x 0.36 = $2,520
- $7,000 x 0.43 = $3,010
This means that your mortgage, taxes, and insurance payments shouldn’t exceed $1,960 per month, and your total monthly debt payments—including that $1,960—should be no more than $2,520.
Unfortunately, the rule says to keep your monthly payments under both of these limits. So the next step is to see what effect your other debts have. Add up your total monthly non-mortgage debt payments, such as credit card, student loan, or car loan payments.
For this example, let’s assume your monthly debt payments come to a total of $950. Subtract that amount from $2,520, and you’ll see that your mortgage payment shouldn’t exceed $1,570.
Since in this example you have relatively high monthly, non-mortgage debt, you're limited to spending $1,570 on a mortgage, taxes, and insurance for a new home. If, on the other hand, you had only $500 in monthly, non-mortgage debt payments, you could spend the full $1,960 on your mortgage payment, since $1,960 + $500 = $2,460, which is less than the rule of 36%, or $2,520, for all debt payments per month.
Why the 28/36 Rule of Thumb Generally Works
The 28/36 rule of thumb provides a pretty good guide for lenders to determine how much home you can afford.
“As a mortgage lender, one of our jobs is to assess risk and the 28/36 rule is a big part of that,” Edelstein said. “You can be approved for a mortgage with ratios higher than 28/36, as high as 50% on the back-end. However, risk goes up and in order to be approved with higher ratios, you will have to have a strong credit score and possibly a larger down payment.”
So, what is included in the DTI ratio’s calculation of your monthly debt obligations? Any of the following payments could be factored into your DTI:
- Future mortgage payment
- Credit cards
- Student loans
- Auto loans
- Personal loans
- Alimony and child support payments
- Loans you co-signed for
Your DTI doesn’t include utilities, cable, cellphone, and insurance bills.
Grain of Salt
Although the 28/36 rule of thumb is a good guideline for many borrowers, it has its weaknesses.
For example, DTI doesn’t account for household expenses like utilities, groceries, and child care. This could result in homebuyers underestimating their true DTI. Don’t forget to consider home repairs and upkeep, too, which could amount to an average of 1% or 2% of the value of the home each year, according to Edelstein.
Because of these additional expenses, Edelstein said that homebuyers should shoot for a lower DTI than the 43% maximum most lenders use—which the 28/36 rule of thumb does. If you do this, you may have a better chance of living the lifestyle you want since less of your monthly debt payments will be tied up in your mortgage.
This is why borrowers can’t just assume that getting approved means they will actually be able to afford the mortgage in the long run.
The Consumer Financial Protection Bureau (CFPB) states that borrowers with high DTIs “are more likely to run into trouble making monthly payments.”
How to Improve Your Debt-to-Income Ratio for a Mortgage
To be comfortable with your mortgage, look for ways to reduce your DTI before you apply for a mortgage.
Lowering your DTI by paying down credit card balances and then never letting those balances exceed 30% of your credit limit is one way to do this, according to Valdes.
“It’s … helpful to come up with a plan to pay down debt—like the debt snowball method, where you tackle your smallest debts one at a time while making minimum payments on the others,” she said. “Creating a budget and cutting back where necessary can also free up extra funds to pay off debt; paying off small debts little by little makes a big difference.”
Another tip is to space out your loan applications. For example, Edelstein advised against applying for a mortgage when you’re also applying for other types of credit, like a new car loan or lease, because the new credit could lower your credit score and raise your DTI.
Here are a few other ways to improve your DTI before applying for a mortgage:
- Pay down your highest balance credit card, or pay smaller amounts to all of your credit card accounts.
- Consider a debt consolidation loan to combine credit cards or other debts at a single interest rate.
- Avoid incurring new debt during the window of time leading up to applying for a mortgage and before you've closed on a home.
- Consider ways you could increase your household income, such as negotiating a raise, taking on a part-time job, starting a side hustle, or seeking a higher-paying role with a different employer.
Frequently Asked Questions (FAQs)
What are closing costs, and how high aare they?
Closing costs are the various things you must pay for to become the owner of record on your home. Plan on spending between 3% and 5% of your home's cost on closing costs, which can include title fees, an appraisal, taxes, and recording fees.
Can I get a mortgage with a 50% DTI?
It could be hard to find a mortgage lender that will grant you a home loan with a 50% DTI, but not impossible. Fannie Mae, a government-sponsored mortgage finance entity, will allow a DTI of "over 45%" on a case-by-case basis if the borrower has six months in payments reserves plus other qualifying factors.
What is the "ability to repay" rule?
It is the due diligence that a mortgage lender must conduct to ensure that borrowers will be able to repay their mortgage. For example, if a mortgage will go up in a few years due to a change in interest, the lender must make sure the mortgage could still be paid.