What Is the 28/36 Rule in Mortgages?

Market Trading EssentialsFebruary 3, 2022

4 minutes read

The 28/36 rule is a rule of thumb for managing your finances and a valuable tool in determining how much house you can afford. The rule says that you should dedicate no more than 28% of your pretax, or gross, income to costs of housing like a mortgage, and no more than 36% of your pretax income to your costs of housing and debt payments combined. Understanding this rule and applying it to your own residence buying (or renting) decisions can keep you from making costly mistakes. Consider working with a financial advisor before you make major decisions like buying a house.

Mortgage rates are more volatile than they have been in a long time. Check out SmartAsset’s mortgage rates table to get a better idea of what the market looks like right now.

What Is the 28/36 Rule?

The 28/36 rule says that that you shouldn’t spend more than 28% of your income on housing (known as the front end ratio) and 36% of your income on total debt/housing payments (known as the back end ratio). It’s a rule of thumb for determining how much debt you can afford to take on, as well as for deciding whether you can afford to buy a given house or rent an apartment.

While the 28/36 rule is generally discussed in terms of mortgage payments. It applies equally to rent payments, however, since in both cases this is a way of examining how much of your monthly income you have committed to third parties.

In a nutshell, the rule boils down to this: If you would have to spend more than 28% of your monthly income on a house or apartment, it is too expensive.

The 28/36 rule is based on pretax income. So, for example, say that you make $60,000 per year. This comes to $5,000 per month in pretax income. Under this rule, you should spend no more than $1,800 on combined debt and housing each month. So, say you rent an apartment that costs $1,200 per month. You could then budget up to a remaining $600 per month on all other debt servicing.

Readers should also note that when you buy a house, your monthly payments include escrowed insurance, tax payments and any homeowners association (HOA) fees in addition to mortgage and interest payments. This generally means that your monthly housing payments will be several hundred dollars higher than the mortgage on its own. Be sure to account for this as you make your 28/36 budget.

Finally, when making a 28/36 budget, only judge your income based on stable, regular payments. The purpose of this rule is to compare the money that you have committed (debt and housing payments) against the money that you can count on (income). We don’t use other line items like utilities or food expenses because, even though they’re important, you have discretion over those bills in a way that you can’t control a mortgage or credit card payment. The same holds true for the income side of this ledger. Don’t assess your ratios based on speculative or unstable forms of income. Doing that can get you into trouble quickly.

Applying the 28/36 Rule

The first place to start with the 28/36 rule is total debt. Applying this rule means that you don’t want to have more than 36% of your total pretax income dedicated to debt and housing. Beyond that, this rule can help you avoid becoming house-rich but cash-poor. One of the most important mistakes that new home buyers make is that they can sell themselves on the hype of their new home.

For some this might mean getting excited about the house that they want. Others might convince themselves that this house is an investment, and the costs will justify themselves over time. Others might simply miss the real costs, including ones that are not as obvious. No matter how you get there, this is known as being cost-burdened. It means that you’re stuck with unavoidable monthly costs that erode your ability to save, spend and live your daily life.

By limiting housing costs to 28% of your total income, you can help avoid having the cost of your house bite into your finances. This is particularly important for buyers. Renters who become cost burdened can walk away at the end of their lease. Buyers who become cost burdened, however, have to try and sell their house … which isn’t necessarily easy if they paid too much for it.

In addition, this is a rule applied by many lenders when they assess your creditworthiness. In addition to looking at your credit score, most lenders look at what’s known as “debt-to-income” ratio. This means they look at how much debt you’re carrying relative to your pretax income. Many lenders will consider this ratio too high if your monthly debt payments exceed approximately one-third of your pretax monthly income.

It is also worth noting that this is a rule that many young people find difficult, if not impossible, to follow. Adults under the age of 40 average around $38,000 to $40,000 in student debt per household, with interest rates averaging around 6%. Particularly for graduates of professional schools, who can have payments well in excess of $1,000 per month, this can often make it impossible to maintain a cash flow according to the 28/36 rule.

The Bottom Line

The existence of the 28/36 rule is testament to our tendency to live beyond our means … and our need for just this kind of a financial guardrail. The rule holds that people should not spend more than 28% of their gross monthly income on housing, whether mortgage or rent and that the total of all expenses, including housing, should not exceed 36% of one’s gross monthly expenses.

Tips on Mortgages

Getting your cash flow and budgeting in order can be a challenge, but you don’t have to tackle it alone. A financial advisor can offer invaluable advice and insight. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
Use our free mortgage calculator to apply the 28/36 rule before you buy a property.
Mortgage rates are more volatile than they have been in a long time. Check out SmartAsset’s mortgage rates table to get a better idea of what the market looks like right now.