Dana George has a BA in Management and Organization Development from Spring Arbor University. For more than 25 years, she has written and reported on business and finance, and she's still passionate about her work. Dana and her husband recently moved to Champaign, Illinois, home of the Fighting Illini. And though she finds the color orange unflattering on most people, she thinks they'll enjoy Champaign tremendously.
Our Mortgage Expert
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You want to buy a home but don't want to get in over your head. The 28/36 rule helps you do that by letting you (and your lender) know how much house you can afford. Here, we'll break down the 28/36 rule, help you understand how it works, and illustrate how it can keep you out of financial trouble.
The 28/36 rule is a guide that helps mortgage lenders determine how large a mortgage you can afford. It's based on two calculations: a front-end and a back-end ratio. Here's how it works.
Front-end ratio: No more than 28% of your income
The front-end ratio is how much of your income is taken up by your housing expenses. According to the 28/36 rule, your mortgage payment -- including taxes, homeowners insurance, and private mortgage insurance -- shouldn't go over 28%.
Let's say your pre-tax income is $4,000. The math looks like this: $4,000 x 0.28 = $1,120.
In this scenario, your total mortgage payment shouldn't exceed $1,120. If lenders see that your monthly payment is over 28%, they worry you'll have trouble making payments. In short, they want to be sure your annual income is more than enough to cover your mortgage payment even if things go south.
Ideally, by sticking to the 28/36 rule, you will have enough money for debt repayment and to build a healthy savings account that can get you through tough times.
Back-end ratio: No more than 36% of your income
The back-end ratio is all of your expenses compared to your income. Lenders prefer your expenses stay under 36% of your income. This could include:
To figure out your back-end debt ratio, multiply your monthly gross income by your total monthly debt payments.
If your income is $4,000, the math looks like this: $4,000 x 0.36 = $1,440.
According to the 28/36 rule, your total monthly debt should be no more than $1,440.
One quirk of the 28/36 rule is that any debt scheduled to be paid off in less than 10 months is excluded from the back-end calculation. For example, if you're paying child support until your child turns 18 and that child's 18th birthday is two months away, that fixed expense will not be included in your total monthly debt.
The 28/36 rule applies only to conventional loans. Here is a comparison of front-end and back-end income ratios for different loan types:
| Loan Type | Front-End Ratio | Back-End Ratio |
|---|---|---|
| Conventional Loan | 28% | 36% |
| FHA loan | 31% | 43% |
| VA loan | N/A | 41% |
| USDA loan | 29% | 41% |
| Energy-efficient FHA loan | 33% | 45% |