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Before you commit to a mortgage, consider applying the 28/36 rule to ensure you're not overextending yourself. How does it work? It’s a practical way to assess your debt level before making a commitment, and since most lenders already use it for loan approval, it's a good idea to calculate it yourself to see where you stand. Here’s how it functions.
What Does the 28/36 Rule Mean?
Ever heard of the term “house poor”? It refers to a situation where a homeowner invests so much in their property that they can't afford other necessary expenses, such as emergency repairs or healthcare bills. This could potentially lead to mortgage default. To prevent this, lenders prefer two key debt-to-income ratios, referred to as the 28/36 rule, which are explained as follows:
- Your total housing costs should not exceed 28% of your gross monthly income. This is known as the 'front-end ratio,' which includes your mortgage payment, property taxes, mortgage insurance, and homeowners association fees (excluding utilities). To check if your front-end ratio is above 28%, add up all your housing-related costs (or estimated costs) and divide the total by your gross monthly income. Then multiply the result by 100 to find your front-end ratio.
What Happens if My Debt Exceeds the 28/36 Limit?
There’s still hope. You may still be eligible for loans with great credit, and as Insider notes, government-backed FHA, VA, or USDA loans allow slightly higher ratios.
However, be cautious—applying for a mortgage will trigger a hard inquiry on your credit, potentially lowering your score temporarily. It’s a good idea to run the numbers first, as this will give you an estimate of your qualification without impacting your credit score. If you don’t qualify, financial experts suggest postponing the home purchase until your income increases or you can save for a larger down payment.
