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The 28/36 rule has long been used as a guideline for home affordability. But with home prices and interest rates at record highs, does this traditional benchmark still make sense for today’s homebuyers? Let’s take a closer look.
What Exactly is the 28/36 Rule?
The 28/36 rule recommends that your monthly housing costs be no more than 28% of your gross monthly income. This includes your mortgage principal interest, taxes and insurance – also known as PITI.
The second part of the rule states that all your monthly debt payments combined including your PITI should total no more than 36% of your gross monthly income. This is called your debt-to-income ratio, or DTI.
So in simple terms:
- 28% of income for housing
- 36% of income for total debt
This rule of thumb has been around for decades as a way for lenders to assess a borrower’s ability to afford a mortgage. But is it still realistic in today’s market?
Why Was the 28/36 Rule Created?
This guideline was established to protect both lenders and borrowers. By keeping housing costs and debt burden low relative to income, it helps ensure that borrowers don’t take on more than they can reasonably afford. This reduces the risk of mortgage defaults.
Before the 2008 housing crisis, many homeowners got burned by taking on loans that far exceeded the 28/36 rule. When home values started dropping, they owed more than their homes were worth and got hit with unaffordable payments.
The 28/36 rule helps prevent this by keeping things relatively conservative. It provides a buffer so that if expenses increase or income drops, borrowers aren’t stretched to the absolute limit.
Does the 28/36 Rule Still Work Today?
Here are the key reasons why the 28/36 rule may be outdated:
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Home Prices Are Much Higher Now – Home values have risen significantly in recent years. This means a higher mortgage loan amount, which results in a larger monthly payment even at low interest rates.
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Interest Rates Have Risen – Rates are well above long-term historic averages today, adding hundreds of dollars to a monthly mortgage payment.
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Other Costs Are Up – Property taxes, insurance, maintenance costs and utilities have all increased faster than wages in many areas.
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It’s Hard to Save a Down Payment – Sky-high home prices make it extremely difficult for buyers to come up with even a 5-10% down payment these days. A larger loan amount makes the payment less affordable.
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Lenders Allow More Flexibility – Many lenders today will approve DTIs higher than 36%, especially for borrowers with good credit, significant assets, or other strong compensating factors.
Realistic Alternatives to the 28/36 Rule
Does this mean you should forget the 28/36 rule entirely? Not necessarily. It can still provide a good ballpark estimate for how much you can afford. But you may need to make adjustments based on your specific situation.
Here are some options if the 28/36 rule won’t work for you:
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Consider a Less Expensive Home – Look for lower-priced options or cheaper locations that better align with the 28/36 benchmarks.
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Put More Down – A larger down payment results in a lower mortgage loan and monthly payment.
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Get a Longer Loan Term – Going from a 30-year to a 40-year mortgage spreads payments out over a longer period for potentially greater affordability.
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Improve Your Credit – A higher credit score can help you qualify for a lower interest rate and larger loan amount.
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Use Two Incomes – Combining incomes with a partner or spouse allows you to afford more house.
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Weigh Pros and Cons – Think carefully before exceeding the 28/36 rule. Make sure you’ll still have enough money left over and can manage higher payments if costs rise.
The 28/36 Rule as a Guideline, Not Law
At the end of the day, the 28/36 rule is just a guideline. Many lenders will be flexible, particularly if you have an excellent credit score or substantial assets. There’s no legal requirement to stick to 28/36 exactly.
The most important thing is to take a close look at your entire financial picture. Run the numbers for a home purchase to make sure it fits within your budget and allows you to meet other goals. Think twice before exceeding 28/36 by too much. With mortgage rates so high now, going too far beyond those benchmarks can get you into trouble.
While not set in stone, the 28/36 rule still provides a prudent starting point for determining home affordability. Adjust from there based on your unique situation. With the right compromises and careful planning, homeownership can still be within your reach even in today’s challenging market. Just make sure to enter it with both eyes open.
Applying the 28/36 rule in today’s high-priced market
With the current market’s record-setting home prices and high mortgage rates, is it really realistic to limit your housing spend to just 28 percent of your income?
For example, the 28/36 rule doesn’t account for your credit score. If you have very good or excellent credit, a lender might give you more leeway even if you’re carrying more debt than what’s considered ideal. This is known as a “compensating factor” on your mortgage application, and it can help you get approved for a larger loan amount.
The rule also does not account for your specific personal circumstances. Unfortunately, many homebuyers today have no choice but to spend more than 28 percent of their gross monthly income on housing. This could be due to a variety of factors, including the gap between inflation and wages and skyrocketing insurance premiums in some popular locations, like Florida.
“The rule is still practical today,” says Greg McBride, CFA, chief financial analyst for Bankrate. “Given today’s high home prices and high mortgage rates, prospective homebuyers might be dismissive of the rule and think it is a relic of the past. But if you can’t align with those guidelines, or aren’t even close, consider it a warning that you’re carrying too much debt or buying too much house.”
What is the 28/36 rule?
This rule of thumb dictates that you spend no more than 28 percent of your gross monthly income on housing costs, and no more than 36 percent on all of your debt combined, including those housing costs. Housing costs encompass what you may hear called by the acronym PITI: principal, interest, taxes and insurance, all the components of a homeowner’s monthly mortgage payment.
The 28/36 rule reflects what’s known as the front-end and back-end ratios on a mortgage:
- Front-end ratio (28 percent): The maximum percentage of gross monthly income you should spend on housing.
- Back-end ratio (36 percent): The maximum percentage of gross monthly income you should spend on all of your debt, including housing. This is also known as your DTI, or debt-to-income ratio.
While it’s commonly called a “rule,” 28/36 is not law — it’s really just a guideline. Mortgage lenders use it to determine how much house you can afford if you were to take out a conventional conforming loan, the most common type of mortgage. Most lenders employ it to ensure you don’t overextend yourself financially — lenders are required by law to evaluate a borrower’s “ability to repay,” and the 28/36 rule helps them do just that. That said, many lenders will allow a DTI of up to 45 percent on conventional loans, and there may be wiggle room in the ratios for FHA, VA and USDA loans as well.
Can You ACTUALLY Afford That House? 28 – 36 Rule Explained
FAQ
Does the 28% rule still apply?
While it’s commonly called a “rule,” 28/36 is not law — it’s really just a guideline. Mortgage lenders use it to determine how much house you can afford if you were to take out a conventional conforming loan, the most common type of mortgage.
How much house can I afford 28-36?
The 28/36 rule states that you shouldn’t spend more than 28% of your annual gross (or pre-tax) income on housing costs. It also states that your total debt – including housing – shouldn’t be more than 36% of your annual income.
What is the 28 36 rule with no debt?
According to the 28/36 rule, you should spend no more than 28% of your gross monthly income on housing and no more than 36% on all debts. Housing costs can include: Your monthly mortgage payment. Homeowners Insurance.
Is 28/36 good?
A household should spend a maximum of 28% of its gross monthly income on total housing expenses according to this rule, and no more than 36% on total debt service. This includes housing and other debt such as car loans and credit cards. Lenders often use this rule to assess whether to extend credit to borrowers.