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- The 28/36 rule is a guideline that can help mortgage lenders evaluate how much debt a borrower can afford to take on.
- Lenders prefer you spend 28% or less of your gross monthly income on housing expenses.
- Ideally, you'd spend 36% or less of your gross monthly income on all debts, but you may qualify with a higher ratio.
When you apply for a mortgage, your lender will carefully evaluate your finances to ensure your can afford to pay back the loan.
During this process, the lender may use the 28/36 mortgage rule to understand how much debt you can afford to take on relative to your income, and whether your level of debt makes you a riskier borrower.
The 28/36 rule and its importance in mortgage lending
The 28/36 rule refers to how much debt you can take on with a conforming mortgage, which is what you may think of as a "normal mortgage" that isn't backed by the government.
However, it's really more of a guideline than a hard-and-fast rule. Many types of mortgages available today allow debt levels that exceed the 28/36 rule. But following this "rule" can help ensure that your monthly mortgage payment is affordable for your budget. You'll also likely have access to better mortgage rates and terms.
What is the 28/36 mortgage rule?
Definition and components of the rule
The 28/36 rule refers to your debt-to-income ratio, which is the amount of debt you pay each month relative to how much income you earn.
According to the rule, you should only spend 28% or less of your gross monthly income on housing expenses, which include your mortgage payment, property taxes and insurance, and homeowners association fees.
You should also only spend 36% of your gross monthly income on all your debts, which include your housing payment as well as things like credit cards and auto loans.
(Remember that gross monthly income refers to the income you earn before taxes are taken out.)
You might have trouble getting a conforming mortgage if either of the following is true: Taking out a mortgage would cause you to spend more than 28% of your gross income on housing expenses, or the amount would make you spend more than 36% of your gross income on total monthly debt payments.
How the 28/26 rule works
Calculation of the front end ratio
You may hear your lender use the term "front-end ratio." This is the ratio of your monthly housing expenses versus your monthly gross income, and according to the 28/36 rule, the ratio should ideally be 28% or less.
The front-end ratio doesn't just refer to your mortgage payments. It refers to all of the following:
- Principal: This is the amount you borrow for your mortgage.
- Interest: The lender charges you interest for borrowing money, and you'll pay money toward interest every month as part of your mortgage payment.
- Property taxes: Your property taxes will depend on your home value and where you live in the US. You could end up paying hundreds each month.
- Insurance: You'll pay for homeowners insurance, and you might have additional insurance policies to cover things like floods or earthquakes.
- Homeowner's association dues: If you live in a neighborhood with a homeowner's association, your monthly dues factor into your front-end ratio.
Keep in mind that utility bills are not part of your front-end ratio.
Let's say your gross income is $5,000 per month. You pay $1,000 toward the principal and interest, $150 toward property taxes, $100 toward homeowners insurance, and $50 in HOA dues. Added together, you're paying $1,300 per month toward your home.
Divide $1,300 by $5,000 for a total of 0.26. Your front-end-ratio is 26%.
Calculation of the back-end ratio
You also may hear the term "back-end ratio" in the mortgage lending process. This is the ratio of your total monthly debt payments compared to your gross monthly income. According to the 28/36 rule, you'd ideally want your back-end ratio to be 36% or less.
The back-end ratio is important because even if your housing payments come to less than 28% of your gross income, you might have other debts that make you a higher lending risk.
The back-end ratio refers to housing payments along with payments toward credit cards, student loans, auto loans, personal loans, alimony, and child support.
Maybe you're paying $1,300 toward your house each month, $50 toward your credit cards, and $250 toward student loans. Your monthly debt payments come to $1,600 total.
Divide $1,600 by your gross monthly income ($5,000) to get 0.32. Your back-end ratio is 32%.
Implications for borrowers
How the rule affects loan eligibility and borrowing capacity
If you have too much debt to pass the 28/36 test, don't throw in the towel just yet. You might still qualify for a mortgage.
A lender may approve your application if other parts of your financial profile are in good shape. Maybe you have an excellent credit score or more than 20% for a down payment.
If you have a lot of debt, you may still qualify for a mortgage but for less than the amount you were hoping to borrow.
The rule's impact on mortgage approval
It might be helpful to think of mortgage approval as having two parts: the first part is whether you meet the lender's minimum requirements, and the second part is what type of rate the lender can offer you based on your creditworthiness. The 28/36 rule often has more to do with that second part.
Conforming mortgages allow DTIs up to 50%. This means you can have a back-end ratio of 50% and still qualify for a mortgage. But because you're outside of the 28/36 rule, you'll likely pay a higher interest rate to compensate for the risk the lender is taking on.
It's more common for mortgage lenders and investors to refer to the back-end ratio when discussing their DTI limits. While lenders will still evaluate your overall situation and may use the 28/36 rule as a guideline, they'll also use that back-end number as a cut off to make sure your total debt isn't too high to qualify.
The 28/36 rule in different loan types
Application of the rule in conventional, FHA, and other loans
Every type of mortgage has its own rules for how high your DTI can be.
With non-conforming conventional mortgages like jumbo loans, you might not qualify at all with a back-end DTI above 45%.
The maximum DTI for an FHA loan is generally 43%, but in some cases it's possible to qualify with a DTI up to 56.9%. With a ratio that high, you'll likely pay a rate much higher than average.
To get a VA loan, you'll likely need a back-end DTI of 41% or lower, though it can vary since lenders are able to set their own limits. USDA loans have a maximum DTI of 41%.
No matter what type of mortgage you're getting, using the 28/36 rule can help you create a budget for how much you can afford to borrow. If you're borrowing significantly more, you could be putting your financial stability at risk.
Navigating the 28/36 rule
Strategies for meeting the rule's criteria
Maybe you have too much debt to pass the 28/36 test, but you still want a great rate on a conforming mortgage. One way to do this is to borrow less, either by making a larger down payment or by lowering your homebuying budget.
You can also work on lowering your debt-to-income ratio by decreasing the amount of debt you owe or increasing your available income.
Remember, too, that your debt isn't the only thing a lender will look at. If other areas of your financial profile are strong, you could still get a good rate, even if you don't meet the 28/36 threshold.
Tips for improving your debt-to-income ratio
Pay down debts
If you have a relatively small balance left on a car loan or credit card, for example, consider paying it off in full. This way, your monthly payment toward this loan will disappear completely.
You may also consider refinancing a loan for lower monthly payments. Just be sure to understand the terms of refinancing beforehand to decide if it's the best financial move.
Look for ways to increase income
Earning more money is easier said than done, but you want to cover all your bases. If you think you deserve a raise, it may be a good time to talk to your boss about the possibility. Or consider getting an additional part-time or freelance job.
Improve your credit score
If you have debt, a mortgage lender may still approve your application if you have a very good or excellent credit score.
Payment history is the most important factor in your credit score, so make sure you're paying all your bills on time. You can also request a credit report from one of the three credit bureaus (TransUnion, Equifax, and Experian) to check for any errors. If you find you've been penalized unfairly, dispute an error with the bureau.
Save for a bigger down payment
A lender may also approve your application if you have more than the minimum requirement for a down payment. The minimum down payment amount will depend on which type of mortgage you get.
The 28/36 rule FAQs
The 28/36 rule is a guideline to help lenders and borrowers understand how much mortgage they can afford to borrow when accounting for their monthly income and existing debt payments.
Since the 28/36 rule is only a guideline, it's definitely possible to get a mortgage if you exceed it. But in general the rest of your financial profile will need to be strong.
The front-end ratio of the 28/36 rule is the percentage of your income that would be spent on your monthly mortgage payment and other housing expenses, including taxes, insurance, and HOA fees. The back-end ratio is the percentage of your income spent on total debts, including your housing payment and other bills.
Different types of mortgages each have their own maximum debt ratio requirements, though lenders may still use the 28/36 rule as a guideline.
Increasing your income, paying down debt, or lowering the amount of money you're borrowing can lower your debt-to-income ratio and help you meet the 28/36 rule.
