When applying for a mortgage, homebuyers need to figure out how much they can afford. If you have no idea where to start, the "28/36" rule can help you (and lenders) arrive at a ballpark figure. Below, CNBC Select looks into this real estate rule of thumb to see how it can help you settle on the right mortgage.
What we'll cover
- What is the 28/36 rule?
- Is the 28/36 rule realistic?
- What to do if you exceed the 28/36 rule
- Bottom line
Compare offers to find the best mortgage
What is the 28/36 rule?
According to the 28/36 rule, you should spend no more than 28% of your gross monthly income on housing and no more than 36% on all debts.
Housing costs can include:
- Your monthly mortgage payment
- Homeowners Insurance
- Private mortgage insurance
- HOA fees and other payments
Other forms of debt besides your mortgage which factor into the "36" portion of the rule include credit card bills, auto loans, student loans, personal loans, alimony and child support payments.
If your gross monthly income is $6,000, the 28/36 rule says you can safely spend up to $1,680 on housing and up to $2,160 on all of your bills.
Can I get a loan if I exceed the 28/36 rule?
When you apply for a mortgage, the lender tries to answer one question: Are you likely to repay the loan? Your debt-to-income ratio (DTI) is one piece of information lenders use to reach their decision, and the 28/36 rule's value lies in making sure you have a DTI that most lenders would consider acceptable.
That being said, it's possible to get a mortgage even if you exceed the 28/36 framework. "It's certainly not a hard and fast rule and not even a guideline," says Laurie Goodman, an Institute Fellow at the Urban Institute and Founder of the Housing Finance Policy Center. "If your credit score is high and you're putting down a lot of money, you might be able to get away with having a higher DTI," she says.
Each lender has its own system for evaluating your risk as a borrower, and your DTI tends to lag in importance compared to your credit score and the size of the mortgage compared to the home's value, for example. "The takeaway here would be that there are no absolute cutoffs in the mortgage market," Goodman says.
Some lenders are more flexible with their requirements. Navy Federal Credit Union doesn't require a minimum credit score, for example. Instead, it works with applicants to find a mortgage that's right for them.
Navy Federal Credit Union
Annual Percentage Rate (APR)
Apply online for personalized rates
Types of loans
Conventional loans, VA loans, Military Choice loans, Homebuyers Choice loans, adjustable-rate mortgage
Terms
10 – 30 years
Credit needed
Not disclosed but lender is flexible
Minimum down payment
0%; 5% for conventional loan option
Terms apply.
Citi Bank's HomeRun program allows borrowers to apply with as little as 3% down. Normally a down payment that low would require private mortgage insurance, but Citi waives the insurance (which can cost up to 2% of your loan amount) for HomeRun borrowers. That could shave hundreds off your housing costs every year.
CitiMortgage®
Annual Percentage Rate (APR)
Apply online for personalized rates
Types of loans
Conventional loans, FHA loans, VA loans and Jumbo loans
Terms
15 – 30 years
Credit needed
580
Minimum down payment
3%
Terms apply.
What to do if you exceed the 28/36 rule
If you find that you're spending more on repaying debt than the rule suggests, try to reduce your debt load before applying for a mortgage.
There are many ways to pay down debt quickly. The snowball method involves paying off your smallest balance first and working your way up to the largest balance. With the avalanche method, you pay off the debt with the highest interest rate first and work your way down to the lowest interest rate.
Your debt load isn't the only criteria that lenders use to judge whether you're able to take on a mortgage debt. Your credit score is one of the largest indicators lenders use to approve borrowers. A higher credit score indicates that the borrower is less likely to default than someone with a lower credit score.
Frequently Asked Questions (FAQs)
FAQs
Is the 28/36 rule before or after taxes?
The 28/36 rule applies to pre-tax, or gross, income.
How much house can I afford if I make $70,000 per year?
According to the 28/36 rule, if you make $70,000 per year before taxes, you should spend no more than $1,633 on housing expenses. ($70,000 / 12 months per year = $5,833 gross income per month x 0.28 = $1,633)
What credit score do I need to buy a house?
Generally, it's recommended to have a credit score of at least 620 before applying for a mortgage. The higher your score, the better chance you have to qualify for better rates.
Bottom line
Like any conventional wisdom, the 28/36 rule is only a guideline, not a decree. It can help determine how much of a house you can afford, but everyone's circ*mstances are different and lenders consider a variety of factors.
Meet our experts
At CNBC Select, we work with experts who have specialized knowledge and authority based on relevant training and/or experience. For this story, we interviewed Laurie Goodman, an Institute Fellow at the Urban Institute and the Founder of the Housing Finance Policy Center.
Why trust CNBC Select?
At CNBC Select, our mission is to provide our readers with high-quality service journalism and comprehensive consumer advice so they can make informed decisions with their money. Every article is based on rigorous reporting by our team of expert writers and editors with extensive knowledge of products. While CNBC Select earns a commission from affiliate partners on many offers and links, we create all our content without input from our commercial team or any outside third parties, and we pride ourselves on our journalistic standards and ethics.
Catch up on CNBC Select's in-depth coverage ofcredit cards,bankingandmoney, and follow us onTikTok,Facebook,InstagramandTwitterto stay up to date.
Read more
5 ways to lower your mortgage payment
What credit score do you need to buy a house?
What is down payment assistance and how do you get it?
What to do if you've been denied a mortgage
Editorial Note: Opinions, analyses, reviews or recommendations expressed in this article are those of the Select editorial staff’s alone, and have not been reviewed, approved or otherwise endorsed by any third party.
