28/36 rule: How to use it to set your home budget smartly

How much house can you afford? The 28/36 rule can help answer this question.

It works like this. The 28/36 rule says you can afford a house if its monthly payment is:

• 28 percent or less of your monthly income – and if...
• 36 percent or less of your income goes toward debt (which includes the new mortgage payment)

This rule isn't ironclad. For example, that 36 percent number could go higher, especially for borrowers using FHA and VA loans. But this rule provides a good place to start the conversation about housing costs. 

What is the 28/36 rule and why it matters

The 28/36 rule is a budgeting tool for home buyers, but it also resembles the calculations mortgage lenders use to evaluate loan applications. So, if you can afford a home with the 28/36 rule, you have a better chance of getting approved for the loan.

Lenders have their own term for these numbers. They call them debt-to-income ratios, or DTIs. In the case of the 28/36 rule:

• The 28 percent number is the front-end DTI.
• The 36 percent number is back-end DTI.

DTI is not the only number lenders check. Credit score, income, down payment, assets – all these numbers enter the equation, too.

But staying within the loan's DTI rules shows lenders you could afford the new home loan.

...in as little as 3 minutes – no credit impact

Understanding the 28% front-end ratio

The front-end DTI ratio measures only housing costs against the borrower's gross monthly income. A borrower with a 28 percent front-end DTI spends only 28 percent of their gross income on housing each month.

Keep in mind the house payment includes more than just repaying the mortgage. Here's the complete breakdown of what goes into a house payment:

• Monthly mortgage payment (principal and interest) to repay the loan
• Annual property taxes broken into monthly installments
• Annual homeowners insurance premiums broken into monthly installments
• Mortgage insurance, if required
• HOA fees, when applicable

Let's say you earn $6,000 in gross income each month. To stay within 28 percent front-end DTI, your total house payment can't exceed $1,680.

Understanding the 36% back-end ratio

The back-end ratio includes all your monthly debt payments, including the new housing costs. Monthly debt includes:

• Credit card minimum payments
• Auto loans
• Student loans
• Personal loans
• Child support or alimony payments
• Any other monthly debt commitments

With $6,000 in monthly income, a 36 percent back-end DTI allows up to $2,160 in debt payments.

That, of course, includes the $1,680 mortgage payment, leaving only $480 for all other debt payments each month to maintain 36 percent DTI. 

Why lenders rely on this rule

Lenders rely on debt-to-income ratios to find out whether borrowers can afford to repay their loans. Federal law requires lenders to make sure conventional and government-insured borrowers can afford their loans.

These rules protect the lender by making a foreclosure less likely. Following DTI rules also protects borrowers from the stress of a house payment they can't afford.

But this doesn't mean borrowers always must stay within the 28/36 limits. Some loans allow higher back-end DTI than 36 percent.

How to calculate your 28/36 budget

Putting the 28/36 rule into practice starts with understanding your numbers:

Step 1: Know your gross monthly income

Gross income is your total pre-tax income from all sources. This includes your salary or regular hourly pay. It may also include bonuses, commissions, side hustle income, but only if you can document the income.

Couples applying together should combine both incomes. Lenders focus on gross income. That's the amount you earn before taxes and deductions.

For example, if you earn $5,000 a month at your full-time job and average $250 a month delivering DoorDash on weekends, your gross monthly income will be $5,250.

Step 2: Calculate your maximum housing payment

Multiply your gross monthly income by 0.28 (28%) to find your maximum housing payment. With a gross monthly income of $5,250, your housing costs shouldn't exceed $1,470.

This amount covers your mortgage payment (principal and interest), property taxes, homeowners insurance, private mortgage insurance if required, and HOA fees.

Want an easier way to see mortgage payment examples? Check out Better's mortgage calculator.

Step 3: Add up your total monthly debt

Add up all your monthly debt payments, including:

• Your new house payment
• Credit card minimum payments
• Auto loan payments
• Student loan payments
• Personal loan payments
• Child support or alimony
• Any other recurring debt obligations

Don't include regular expenses like groceries or utilities or contributions to retirement. These aren't part of the debt-to-income calculation.

Let's say your new house payment will be $1,470. Your car payment is $300 a month, and you pay $85 in credit card minimum payments, and your student loan costs $250 a month. That totals $2,105 in debt.

Step 4: Check your debt-to-income (DTI) ratio

Divide your total debt by your gross monthly income. Multiply the answer to see your DTI.

To continue with the example from above, the total debt ($2,105) divided by gross income ($5,250) equals a back-end DTI of 40 percent, which is a little higher than the 36 percent the 28/36 rule recommends.

...in as little as 3 minutes – no credit impact

Is the 28/36 rule realistic in today's market?

With rising home prices outpacing income growth in many housing markets, staying within 28/36 DTI limits won't be possible for homebuyers. 

Conventional loans are more likely to require DTIs in the neighborhood of 28/36 but FHA loans and VA loans often allow higher DTIs, especially on the back end, helping borrowers with lower incomes and higher debt loads from students loans.

The 28/36 rule still offers a good way to measure a home's affordability, but breaking the rule doesn't automatically doom a loan file.

What happens when your DTI exceeds 36%?

Borrowers with higher DTIs should consider:

– FHA loans. This loan program allows back-end DTI ratios of 43 percent and sometimes up to 50 percent. FHA loans include mortgage insurance that protects the lender, allowing higher DTIs. 

– VA loans. Most military veterans and active duty service members can use VA loans which don't set a maximum DTI. The VA recommends DTIs stay within 41 percent, but it can insure loans with higher DTIs, especially when borrowers have strong compensating factors such as a high income or excellent credit score.

– Non-QM loans. These loans dodge DTI rules altogether. They're riskier for borrowers and lenders, so they charge higher interest rates. Real estate investors use non-QM loans, but they're usually not a good choice for buying primary residences. 

When lenders make exceptions

Even with conventional loans, mortgage lenders frequently approve borrowers who exceed the 28/36 rule. Lenders can do this when borrowers have otherwise strong loan applications. 

Strong applications often include:

– A credit score of 740 or higher shows consistent payment history and financial responsibility. Lenders view excellent credit as a strong predictor of future performance, even with higher debt ratios.

– A down payment of 10 percent or more reduces lender risk by lowering the loan size. Putting more down also proves the buyer is committed to the home. Putting down 20 percent or more eliminates private mortgage insurance (PMI) on a conventional loan which could lower the mortgage payment. 

– Money left in savings after closing shows the borrower has a financial cushion. This reassures lenders when DTIs push the upper limits. Having several months of mortgage payments saved shows you're ready for unexpected expenses.

– A steady employment history with consistent or increasing income predicts more earnings in the future. Lenders particularly value borrowers who show career progression over time.

– High earnings. Someone who earns $12,000 a month but spends 40 percent on debt still has $7,200 to spend on other expenses. Someone who earns $6,000 a month and spends 40 percent on debt has only $3,600 left for other expenses. Lenders call this residual income.

Many lenders take a holistic view of each borrower's loan file rather than applying DTI rules firmly across the board.

The best way to see where you stand? Get a preapproval which can estimate housing costs.

How to improve your DTI ratio

Breaking the 28/36 rule shouldn't dash your homeownership dreams, but a lower DTI ratio can open up more loan options, creating more ways to save.

There are several ways to lower DTI:

Pay down debt before applying

Credit card balances are a good place to start. Lowering balances will lower minimum payment amounts which directly affect DTI.

Paying off a car or a student loan should also lower DTI, but check with your loan officer before making big changes. A bigger savings account may be more valuable than a paid-off loan from the lender's point of view.

Loan consolidation is another strategy to lower monthly payments and DTI. Again, ask your loan officer first if you're on the verge of making an offer on a house. The extra credit activity from a consolidation loan could lower your credit score.

Improve your credit score

A stronger credit score can unlock lower interest rates which reduces your potential monthly mortgage payment. Lower payments lower DTI ratios.

For example, someone with a 740 credit score might qualify for an interest rate 0.5 percent lower than someone with a 640 score. On a $400,000 loan, that's roughly $120 less per month.

Simple credit improvement tactics:

• Keep credit utilization below 30% across all cards
• Make all payments on time (set up autopay if needed)
• Avoid opening new credit accounts while mortgage shopping

Make a larger down payment

Putting 10 percent down instead of the minimum down payment of 3% to 5% will lower the amount you need to borrow and create a lower monthly payment. a lower payment, of course, lowers DTI.

Buy a smaller, less expensive home

Less expensive homes should offer lower monthly payments, which lowers DTI ratios. This goes beyond the purchase price. Less expensive homes also cost less to insure and charge less in property taxes, all of which is included in the house payment.

Avoid homes in HOA communities

Homeowners association fees can add hundreds to a house payment, driving up DTI. Look for homes in traditional neighborhoods that aren't governed by HOA boards.

28/36 rule FAQs

Does the 28/36 rule apply to all loan types?

Conventional loans follow the 28/36 rule or a similar guideline, but government-backed loans, like FHA and VA loans, offer more wiggle room for borrowers. Depending on the borrower's unique profile, an FHA or VA lender may approve DTIs up to 50 percent. Jumbo loans typically require stricter adherence to 28/36 ratios, though compensating factors like excellent credit can help.

Is spending 28% of income on housing too much?

This depends on your individual situation. Someone with almost no debt may be able to pay more than 28 percent of their income toward housing. Others may do better spending 25 percent or less on the house payment. 

Can I get approved with a higher DTI ratio?

Yes, conventional loan borrowers with strong compensating factors, such as an excellent credit score, a big down payment, or a healthy savings account, can make a case for higher DTI limits. Government-insured loans also allow more DTI flexibility. 

Should I include utilities in the 28% calculation?

No. Front-end DTI ratio covers only mortgage principal, interest, property taxes, homeowners insurance, and HOA fees. Utilities, groceries, and other living aren't part of this percentage.

Should I reduce my housing budget to save more for retirement?

This is a question for a financial advisor who knows your unique goals, obligations, and resources.

What if I'm self-employed or have irregular income?

Lenders typically use a two-year average of your income for self-employed borrowers. You'll need additional documents like tax returns and profit-loss statements to verify your earnings stability.

See how your DTI translates with a preapeproval

In a perfect world, you'd stay within the 28/36 rule. The real world doesn't always follow this simple rule of thumb.

To see how a new mortgage payment would fit within your actual budget as it exists today, get a mortgage preapproval.

Better's preapproal process can deliver fast results. Since the process uses only a soft credit check, it shouldn't affect your credit score. 

...in as little as 3 minutes – no credit impact