Want to Avoid Being House Poor? Stick to the 28/36 Rule

April 29, 2024 - 8 min read

“House poor” is when you spend so much on housing that you have little left for anything else. This can make it harder to pay your bills or save for an emergency, so it’s important to set a reasonable and realistic budget when buying a home.

Sticking to the 28/36 housing rule can help you stay within your means and avoid the pitfall of getting in over your head.

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What is the 28/36 rule?

Mortgage lenders take a number of factors into consideration when determining affordability. Among these factors is your front-end and back-end ratio.

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The front-end ratio, typically 28%, is the percentage of your gross monthly income that goes toward housing expenses (mortgage principal, interest, property taxes, and homeowner’s insurance).

The back-end ratio (around 36%) includes housing, as well as other recurring monthly debts like car loans, student loans, and credit card payments.

The 28/36 rule is a practical guide when buying a home. Keeping your percentages within these ranges ensures that you don’t commit too much of your income to housing costs or debt payments. Thus, you’re able to maintain a healthy balance between affordability and overall stability.

Calculating your budget using the 28/36 rule

To determine your maximum housing expense using the front-end ratio, multiply your gross monthly income by 28%. So, if your gross monthly income is $7,000, your maximum housing expense would be $1,960 ($7,000 x 0.28).

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Keep in mind that your debt-to-income ratio with the back-end ratio extends beyond housing expenses and includes all minimum monthly debt payments. To calculate this, multiply your gross monthly income by 36%.

Based on this calculation, if your gross monthly income is $7,000, your total monthly debt payments shouldn’t exceed $2,520 ($7,000 x 0.36).

Now, let’s apply the 28/36 rule to a specific purchase price.

Suppose you’re thinking of buying a $400,000 home with a monthly gross income of $7,000 and a 5% down payment of $20,000.

Subtracting the down payment from the purchase price leaves a mortgage loan amount of $380,000 ($400,000 - $20,000).

Let’s also say you have a 7% interest rate, resulting in a mortgage payment of approximately $2,529 over a 30-year term. Additionally, you have other monthly debt payments in the amount of $400, which leaves roughly $2,120 available for your mortgage payment.

In this scenario, the house payment unfortunately exceeds the $1,960 limit set by the front-end ratio. Now, some lenders might still allow you to purchase the home (if you have compensating factors such as a high credit score or a large cash reserve).

However, if you prefer sticking to the 28/36 rule, you’ll need to explore homes with a lower sales price or increase your down payment to ensure your monthly mortgage payment falls within the recommended range.

What happens if I exceed the 28/36 rule?

Since the 28/36 rule sets boundaries on how much of your income you can allocate for housing and total debt payments, exceeding these ratios might raise concerns for lenders.

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A front-end ratio that surpasses 28% often indicates spending a significant chunk of your income on housing, leaving little wiggle room for other expenses or emergencies. Similarly, a back-end ratio above 36% suggests that your total debt load is relatively high compared to your income.

When borrowers exceed these thresholds, some mortgage lenders perceive them as “risky,” and they might offer a smaller home loan or charge a higher interest rate to offset the higher risk of default.

Therefore, sticking to these ratios not only increases the likelihood of getting approved for a mortgage, it can help you get favorable loan terms.

How to improve your debt-to-income ratio

To improve your debt-to-income ratio, or DTI, begin by tackling debt like credit cards or personal loans. For example, pay more than your minimums and use windfalls like a tax refund to reduce balances.

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Depending on your financial situation, you might also consider consolidation options, which involve combining multiple debts into a single, more manageable payment with a lower interest rate. This can potentially save money in the long run.

Additionally, figure out where you can cut back to free up funds for debt repayment, and negotiate with creditors to reduce your interest rates.

Most importantly, don’t accrue additional debt and focus on building an emergency fund to cover unexpected expenses. You might also seek guidance from a financial advisor or a non-profit credit counselor who can tailor a debt repayment strategy based on your circumstances.

Other considerations for what you can afford

Beyond the 28/36 rule, take into consideration additional expenses like property taxes, insurance, homeowner association (HOA) fees, and maintenance costs.

These expenses can significantly impact your housing budget and overall affordability.

Property taxes and insurance premiums vary depending on location and property value, while HOA fees are mandatory in certain communities.

As a homeowner, there’s also the cost of ongoing property maintenance and repairs, which can fluctuate and be unpredictable. So it’s important to regularly set money aside for these expenses.

When making a wise financial decision, you should also take into account future goals and potential lifestyle changes. This can include saving for retirement, starting a family, and paying for a child’s education. If you spend too much on a house, it can become difficult to hit these goals.

Likewise, make sure you anticipate possible changes in income or expenses due to career advancements, health-related issues, and other life events. By accounting for these factors, you can make decisions that align with your long-term objective.

The bottom line

Sticking to the 28/36 rule protects against overspending and potential financial strain. By adhering to these guidelines, you can avoid becoming house poor and maintain financial stability. It’s a practical approach to getting a home within your means.

Need help figuring out an appropriate housing budget? Connect with a lender who can verify your eligibility and tell you just how much house you can afford.

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What is the 28/36 rule in mortgage lending?

The 28/36 rule is a guideline used by lenders to determine the maximum percentage of a borrower’s gross monthly income that can be allocated to housing expenses and total debt payments. It states that no more than 28% of the borrower’s gross monthly income should be spent on housing expenses, and no more than 36% should be utilized for total debt payments.

How is the 28/36 rule used in mortgage approval?

Lenders use the 28/36 rule as a standard to assess a borrower’s financial stability and ability to manage mortgage payments. It helps lenders evaluate the borrower’s debt-to-income ratio and ensures that the borrower can afford the mortgage without being overburdened by debt.

What counts as housing expenses under the 28/36 rule?

Housing expenses typically include mortgage payments (principal, interest, taxes, and insurance), as well as homeowners association fees, and, if applicable, private mortgage insurance (PMI) or mortgage insurance premiums (MIP).

What is considered total debt under the 28/36 rule?

Total debt includes all monthly debt obligations, such as credit card payments, car loans, student loans, personal loans, and any other outstanding debt obligations.

Can I still qualify for a mortgage if I exceed the 28/36 rule limits?

While the 28/36 rule is a standard guideline, some lenders may have flexibility depending on the borrower’s overall financial profile. However, exceeding these limits may impact loan approval and the terms offered by lenders.

How can I calculate my own 28/36 ratios?

To calculate the 28% housing ratio, divide your monthly housing expenses by your gross monthly income and multiply by 100. To calculate the 36% total debt ratio, divide your total monthly debt payments by your gross monthly income and multiply by 100.

Are there any exceptions to the 28/36 rule?

Some loan programs, such as FHA and VA loans, may have more flexible debt-to-income requirements. Additionally, compensating factors, such as a high credit score or substantial assets, may allow borrowers to qualify with slightly higher ratios.

How does the 28/36 rule impact my ability to afford a home?

Adhering to the 28/36 rule ensures that you are not stretching your finances too thin and are more likely to afford your mortgage and other debt obligations comfortably.

Valencia Higuera
Authored By: Valencia Higuera
The Mortgage Reports contributor
Valencia Higuera is a freelance writer from Chesapeake, Virginia. As a personal finance and health junkie, she enjoys all things related to budgeting, saving money, fitness, and healthy living.
Aleksandra Kadzielawski
Reviewed By: Aleksandra Kadzielawski
The Mortgage Reports Editor
Aleksandra is the Senior Editor at The Mortgage Reports, where she brings 10 years of experience in mortgage and real estate to help consumers discover the right path to homeownership. Aleksandra received a bachelor’s degree from DePaul University. She is also a licensed real estate agent and a member of the National Association of Realtors (NAR).