What Is The 28/36 Rule For Buying A Home?

Spending more money than you can reasonably afford on a home is a common problem for many new homeowners. In fact, 22% of millennial home buyers feel they’re paying too high of an interest rate on their mortgage, and another 14% feel their mortgage overall is too expensive, according to earlier reporting from CNBC Select.

You need to carefully budget the specifics of your mortgage to avoid taking on more debt than you can afford, but figuring out where to start can feel overwhelming. To help, try applying the “28/36 rule”, a broad guideline that lenders use to judge whether you can handle your mortgage debt. We break down below how to make this rule work for you.

According to the 28/36 rule, you or your household should spend no more than 28% of your gross monthly income on total housing costs. You should also avoid paying more than 36% of your gross monthly income toward any non-housing debt.

Examples of housing costs include:

• Your mortgage payment (principal and interest)
• Homeowner’s insurance
• Private Mortgage Insurance (PMI)
• HOA fees (if applicable)

Other forms of debt that don’t involve housing include credit card debt, auto loans, student loans, personal loans, alimony and child support payments.

For instance, let’s say your gross monthly income is $6,000. Going by the 28/36 rule, this means that you can safely spend up to $1,680 on your mortgage payment and up to $2,160 on other debt payments. Of course, this doesn’t mean that you should spend this much on a mortgage payment or on paying down other debts; you’ll want to keep your personal circumstances and unique financial goals in mind.

If you apply this rule to your personal income and expenses and find that you’re currently putting more towards paying back debt than the “rule” safely suggests, try to reduce your debt load before applying for a mortgage.

There are many ways to pay down debt quickly. Two of the more popular strategies are the snowball method and the avalanche method. The former involves paying off your smallest balance first and working your way up to the largest balance. The latter has you pay off the debt with the highest interest rate first and work your way down to the lowest interest rate.

Of course, lenders use other criteria to judge whether you’re able to take on a mortgage debt — like your credit score, for instance. Your credit score is one of the strongest benchmarks used for approving borrowers for any form of debt.

A higher credit score indicates that the borrower is more likely to pay back any money they borrow while a lower credit score could indicate the borrower may have trouble paying back borrowed funds.

The 28/36 rule isn’t necessarily a hard-and-fast rule since lenders look at other factors when approving you for a mortgage. And in some instances, the rule may feel a bit unrealistic when you consider that property values have increased while wages have stagnated.

As of 2021, the median monthly home payment in California, for instance, is $2,523 (this figure includes the mortgage payment, property taxes, utilities, insurance costs, and HOA fees if applicable). Going off of the 28/36 rule, this means that your gross monthly income must be approximately $9,010 (or $108,128 per year) to afford the median monthly home payment in California.

According to Census data for California from 2021, the median household income in the state was $84,097. This means that many individuals wouldn’t be able to comfortably afford the median home payment.

In this instance, following the 28/36 rule may seem like a pipe dream. Again, though, lenders look at more than just the 28/36 rule when approving potential borrowers for mortgages. And some lenders are more flexible with some requirements. Navy Federal Credit Union, for instance, doesn’t necessarily have a minimum credit score that they look for when approving mortgage applicants; instead, this lender aims to work with their credit union members to analyze their circumstances and find the right mortgage fit for them.

Citi Bank offers the HomeRun program that allows borrowers to apply for a mortgage with as little as 3% down. Normally a down payment that low would require you to pay private mortgage insurance (PMI), which can run anywhere from 0.1% to 2% of your loan amount but Citi waives this fee for borrowers in the program. Not having to pay PMI could potentially help shave off a few hundred dollars from your monthly housing payment, depending on how big of a loan you borrowed.

Much like any other rule of thumb, the 28/36 rule is a guideline but not a hard-and-fast rule when it comes to getting approved for a mortgage. Borrowers can use this rule to help improve their financial standing before applying for a mortgage. This way, they can make sure they qualify for better rates and terms and improve their likelihood of being approved.

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