Why the 28/36 rule matters for home affordability

If you’ve found your dream home but you’re not sure if you can afford it, you’re not alone. The gap between a house that catches your eye and what you can realistically carry in monthly payments is where many buyers find themselves stuck.

The 28/36 rule, which is a general framework that lenders and financial advisors use, can help you determine an affordable price range by considering your income against your debt obligations and housing costs. It’s not a rigid guide, but understanding how it works can be the difference between a mortgage payment that fits your financial goals and one that stretches your finances and makes you house poor.

We’ll walk you through what you need to know about the 28/36 rule, why it matters, and how to navigate it.

What is the 28/36 rule?

The 28/36 rule is a popular rule of thumb. It's more of a lender guideline rather than a fixed law and includes two parts: 

• Front-end ratio: The first number in the ratio, 28, represents the maximum amount of your gross monthly income you should spend on housing costs. It’s the housing expense ratio. This means you shouldn't spend more than 28% of your gross monthly income on housing costs.
• Back-end ratio: The second number, 36, is known as the debt-to-income ratio, which is your monthly debt payments divided by your monthly gross income. The rule dictates that you shouldn't spend more than 36% of your gross monthly income on your total debt payments.

For example, let's say your monthly gross pay is $8,000. In that case, your housing costs shouldn't be more than $2,240, and your total debt shouldn't exceed $2,880.

Housing costs typically include PITI, which includes the following:

• Principal
• Interest
• Taxes
• Homeowners insurance

And it can also include:

• Private mortgage insurance
• HOA fees

When it comes to the debts you're shouldering, this can include everything from auto loans to student loans to credit card and child support payments.

Why the 28/36 rule is so important

The 28/36 rule is an important benchmark for lenders when evaluating the risk associated with a borrower. It’s also an important tool for potential homebuyers who want to look at their own financial stability before deciding to buy a house.

This guide can help you steer clear of spending too much on a property, which could leave you house poor. It especially rings true in a high-priced seller's market with elevated mortgage rates.

The 28/36 rule can also influence your odds of getting the green light for a mortgage, getting approved for good terms, and having enough cash stashed in your budget for housing-related expenses, including emergencies.

Example of the 28/36 rule in action

Let's see how the 28/36 rule works for a home buyer who wants to own a house in Chicago. We'll base the example on an income of $6,000 per month, which is a salary of $72,000 a year.

1. Calculate the front-end ratio

If your monthly gross income is $6,000, 28% means you can spend up to $1,680 per month in housing costs. Some formulas allow for a slightly higher spend on housing expenses.

Using the Rocket Mortgage home affordability calculator, you can estimate the home price point you might be able to afford based on the housing payment and other financial factors, such as your income and debt obligations. Let’s use the following set of conditions for our example:

• Purchase location: Chicago, IL
• Yearly income before taxes: $72,000
• Cash to buy: $15,000
• Credit profile: 720+
• Monthly debt: $0 (other debts aren’t factored into this ratio)

2. Calculate the back-end ratio

As for the back-end ratio, 36% of $6,000 equates to up to $2,160 per month in total debt payments, which includes housing expenses. 

For example, let's say you have $600 in monthly debt payments. This includes a $450 car payment, a $100 student loan payment, and a $50 credit card payment.

Again, using Rocket Mortgage home affordability calculator, and inputting your maximum house price and monthly payment amount, you can see how much house you can afford without going over the 36% DTI ratio. In this case, the maximum home price that would be affordable would be $202,331 and the affordable monthly mortgage payment would be $1,513.

3. Compare the results

As you can see, when it comes to the front-end and back-end ratio calculations, the numbers you get for your home affordability and your maximum mortgage payments differ. Your non-housing debt can be a big influence on how much house you can afford.

You can use this mortgage calculator from Rocket Mortgage to see how much the monthly payment would be for homes in your desired price range. From there, you can apply that to your own 28/36 calculations.

Can you get a mortgage if you exceed the 28/36 rule?

It can be more difficult to follow the 28/36 rule if you live in a higher-cost area, your income hasn't kept up with inflation, or if you're burdened with a ton of debt.

While it may be more of a challenge to get approved for a mortgage if you go over the 28/36 rule, you can offset that with other factors. Borrowers with a larger down payment, good credit score, or significant savings may still be approved with a DTI ratio as high as 43% or higher, depending on the loan. FHA loans and VA loans are more flexible and allow for a higher DTI.

If you have questions, you can speak to a Rocket Mortgage Home Loan Expert about your situation and needs.

Tips for meeting the 28/36 rule

If you’re looking for ways to stick to the 28/36 rule, here are some ideas for you to consider:

• Aim to buy a lower-priced home. Let's say you're a first-time homebuyer. You might have your sights on your dream house or a house in a highly desirable, but pricey, neighborhood. Buying a house with a lower price tag can help bring down your total housing costs and keep you under the 28/36 ratios.
• Make a large down payment. If you find yourself struggling to come up with the funds for a more sizable down payment, you may want to look into mortgage assistance programs.
• Pay down other debt with the debt snowball or avalanche method. The debt snowball is when you focus on paying the smallest debt first, then working your way up. The avalanche method is where you start with the debt with the highest interest amount, then work your way down.
• Find ways to increase income. It is possible to buy a house with a low income. However, finding ways to boost your earnings can bump up your housing budget while sticking within the 28/36 rule. See if you can take on an additional project at your current job, work overtime, or take on side gigs.
• Consider compensating factors. For example, greater assets, a high credit score, or a larger down payment can all help with your getting approved with higher ratios. Don’t forget to check your credit report to remove any errors that may have impacted your score.

The bottom line: Use the 28/36 rule as a home affordability guideline

The 28/36 rule is an important one. It helps lenders assess the risk of approving your mortgage, and it can help you figure out how much house you can reasonably afford. Consider using this guideline to come up with your house-buying budget and to take steps to improve your debt-to-income ratio and other qualifying factors. When you're ready to buy, you can apply for a home loan with Rocket Mortgage.