The 28/36 Rule: How Much House Can You Actually Afford
Banks use the 28/36 rule to decide your mortgage qualification. Learn how to apply it to your income and debt, and when it makes sense to bend the rules.
What Is the 28/36 Rule
The 28/36 rule is a lending guideline that says your housing costs should not exceed 28% of your gross monthly income, and your total debt payments should not exceed 36%.
The 28% is called the front-end ratio or housing ratio. It includes your mortgage payment, property taxes, homeowners insurance, HOA fees, and PMI if applicable.
The 36% is called the back-end ratio or debt-to-income (DTI) ratio. It includes everything in the front-end ratio plus car payments, student loans, credit card minimums, personal loans, and any other monthly debt obligations.
How to Calculate Your Numbers
Step 1: Find your gross monthly income. If you earn $75,000 per year, your gross monthly income is $6,250.
Step 2: Calculate your 28% limit. $6,250 x 0.28 = $1,750. This is the maximum you should spend on total housing costs per month.
Step 3: Calculate your 36% limit. $6,250 x 0.36 = $2,250. This is the maximum for all monthly debt payments combined.
Step 4: Subtract existing debts from the 36% limit. If you pay $400 for a car and $200 for student loans, that leaves $2,250 - $600 = $1,650 available for housing. In this case, the back-end ratio ($1,650) is more restrictive than the front-end ($1,750).
What the 28/36 Rule Means for Home Prices
Using the example above with a $1,650 maximum housing payment at current rates: At 6.5% interest with 20% down on a 30-year mortgage, a $1,650 total payment (including taxes and insurance) supports roughly a $230,000 to $250,000 home price.
On a $95,000 salary with no other debts, the front-end ratio allows up to $2,217 per month for housing, which supports a home price around $320,000 to $340,000.
These are guidelines, not hard limits. Your actual qualification depends on your credit score, down payment, loan type, and the specific lender.
When Lenders Bend the Rules
Many lenders approve borrowers beyond the 28/36 rule. FHA loans allow DTI ratios up to 43%, and sometimes even 50% with compensating factors like strong cash reserves or a history of successfully managing similar payment levels.
Conventional loans backed by Fannie Mae can go up to 50% DTI with strong credit and reserves. VA loans have no strict DTI cap, though most lenders prefer 41% or below.
Compensating factors that help you qualify beyond 28/36: credit score above 740, significant cash reserves (6+ months of payments), stable employment history of 2+ years, large down payment (20%+), and minimal non-housing debt.
Should You Max Out Your Budget
Just because a lender approves you for a certain amount does not mean you should borrow that much. The 28/36 rule does not account for retirement savings, emergency funds, childcare, groceries, entertainment, or other life expenses.
A more conservative approach: aim for 25% of take-home pay (not gross) for total housing costs. This leaves room for savings, investing, and unexpected expenses. On a $75,000 salary with roughly $5,100 monthly take-home pay, that means a housing budget of about $1,275.
Remember: your mortgage is a 30-year commitment. Being slightly conservative gives you financial flexibility for decades.
Frequently Asked Questions
What DTI ratio do most lenders require?
Most conventional lenders prefer 43% or lower total DTI. FHA allows up to 50% in some cases. VA has no strict limit. The lower your DTI, the better your rate and terms.
Does the 28/36 rule use gross or net income?
The 28/36 rule uses gross income (before taxes). However, many financial advisors recommend using net income for a more realistic budget since gross income overstates what you actually have available.
What if my DTI is too high?
Pay down existing debt (especially credit cards), increase your down payment to reduce the loan amount, extend the loan term, or consider a less expensive property. Even paying off a $300 monthly car payment can significantly increase your home buying power.