Understanding the 28/36 Rule in Personal Finance

When you’re trying to figure out how much to spend on a home and look at your debt, the 28/36 rule can help ensure that you don’t fall into financial hardship. This well-known rule can work equally well for lenders and borrowers, who both rely on the 28/36 ratio to determine how much house they can comfortably afford without stretching their budgets.

What Is the 28/36 Rule?

The 28/36 rule is a widely used budgeting guideline in real estate and mortgage lending to determine how much housing a borrower can reasonably afford. This rule of thumb may have you spending no more than 28% of your gross income for accommodation and no more than 36% of your gross income toward overall debt payments.

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This percentage of gross income for a mortgage is one of the main factors lenders consider when reviewing mortgage applications. The 28/36 rule real estate agents use, which helps you keep your home in control and not outlive it, may leave too much to chance — or human behavior. Imagine it as your financial safety net, with the first number (28%) covering housing costs and the second (36%) covering monthly debt.

Breaking Down the 28% and 36% Guidelines

This is how we can calculate the rule.

The 28% Housing Ratio

This percentage of your gross income for mortgage payments includes more than just your principal and interest. Your total expense encompasses:

• Any principal and interest on your mortgage
• Property taxes
• Homeowners insurance
• HOA fees, if applicable
• Private mortgage insurance (PMI), if your down payment is less than 20 percent

For instance, if your gross monthly income is $6,000, your total expenses should not exceed 28 percent of that amount, or about $1,680.

The 36% Total Debt Ratio

This broader debt ratio includes all recurring monthly obligations:

• All costs from the 28% calculation
• Credit card minimum payments
• Auto loan payments
• Student loan payments
• Personal loan payments
• Child support or alimony
• Any other recurring debt

Using the same $6,000 monthly income, your total payments should stay under $2,160 (36% of $6,000). This leaves you $480 monthly for non-housing debt obligations.

Why Lenders Focus on Gross Income

Lenders like gross income because it is a uniform rule number that isn’t subject to personal tax situations or deductions. Gross income is what you earn before anything is deducted, which makes it simpler for lenders to compare applicants. But be realistic about your true take-home pay when you’re working out what you can really afford.

How to Calculate Your Own Ratios

Step 1: Determine Your Gross Monthly Income

Add up all income sources before taxes: base salary, bonuses, commissions, rental income, and other regular income.

Step 2: Calculate Your Housing Expenses

Estimate total monthly costs: mortgage payment, property taxes divided by 12, annual insurance divided by 12, HOA fees, and PMI if applicable.

Step 3: Add Up All Monthly Debt Obligations

List every recurring payment: housing expenses plus car loans, student loans, credit cards, and other debt.

Step 4: Do the Math

• Housing ratio = (Total expenses ÷ Gross monthly income) × 100
• Debt ratio = (Total monthly debt ÷ Gross monthly income) × 100

Example:

• Gross monthly income: $7,000
• Housing costs: $1,800
• Car payment: $350
• Student loans: $200
• Credit card minimums: $100

Housing ratio: ($1,800 ÷ $7,000) × 100 = 25.7% Debt ratio: ($2,450 ÷ $7,000) × 100 = 35%

Both ratios fall within the 28/36 guidelines, making this mortgage payment rule affordable.

Common Mistakes When Applying the 28/36 Rule

Look beyond the mortgage payment. With $400 in taxes, $150 in insurance, and $100 HOA fees, the real cost is now 2,150. A monthly payment of 1,500 becomes: a monthly cost of! Think about the changes coming to your finances, from buying a car to fluctuating interest rates. Do so based on what you anticipate your situation will be this year, not just where it stood on Dec. 31, 2019.

Even if you meet the 28/36 rule, it’s not a guarantee that you’ll feel comfortable. You still have to pay for groceries, utilities, health care, entertainment, and savings. Treat the rule like a ceiling, not a floor. Debt limits the amount you can spend on lodging. If you are spending 8% of gross income on non-housing debt, then you can only spend 28% on lodging to reach the total 36%.

Practical Tips for Staying Within the 28/36 Range

Use a budget calculator app to track all income and expenses. Understanding where your money goes helps you identify opportunities to reduce obligations or increase savings. Eliminate expensive credit card balances and personal loans before taking on a mortgage. This improves your ratio and frees up monthly cash flow.

A 20% down payment eliminates PMI, reducing monthly costs and helping you stay within the 28% threshold. Property insurance rates vary significantly between providers. Comparing quotes can save hundreds of dollars annually on monthly expenses.

Your financial picture changes over time. Reviewing your ratios quarterly ensures you maintain healthy finances. Having three to six months of expenses saved provides a cushion for income decreases or unexpected costs, allowing you to maintain payments during setbacks.

The 28/36 rule is a general guideline, but costs vary by location. In high-cost areas, many homeowners exceed the 28% ratio while maintaining stability. Use the rule calculator as a starting point and adjust for your specific circumstances.