Using the 28/36 Rule to Know What You Qualify to Borrow

Unforeseen circumstances are just that – unforeseen and unpredictable. When applying for a mortgage loan it’s important for potential borrowers to consider that their current financial situation could change unexpectedly, and they should to be honest with themselves about how much debt they could handle if they got stuck with a too-high monthly mortgage payment. Every potential borrower needs to ask themselves this question:  “How much mortgage can I afford?”

That’s where the 28/36 rule comes in. When potential home buyers apply for a conventional mortgage loan, lenders use the 28/36 rule to help determine the borrowing capacity and whether or not they are likely to default on their mortgage loan. The 28/36 rule is the mortgage lending industry’s standard for calculating the amount of debt that a borrower can handle. Essentially, the 28/36 rule means the borrower’s household should not spend more than 28% of its gross monthly income on total housing expenses and no more than 36% on other total debt like car loans, credit card bills, utility bills, household and family expenses.

What the 28/36 Rule Looks Like

Using a monthly gross household figure of 4,500 (that’s an annual household income of $46,000), the 28/36 rule would mean the borrowers could spend a maximum of $1,260 on their monthly housing (including mortgage, insurance, property taxes, home owner association fees, etc.). That leaves the household with an additional $360 to cover any remaining expenses or loans.

What the 28/36 Rule Doesn’t Take into Consideration

Unfortunately, the rule doesn’t cover everything that happens in life that could impact your financial picture. It’s important to include:

  • Home maintenance upkeep and repairs.
  • Health insurance, car insurance, wind and hail insurance, and flood insurance.
  • Groceries, gas, medical expenses, school expenses.
  • Future obligations like college tuition and graduation costs.

While these day-to-day expenses are often overlooked, they add up and can affect your monthly reserves.

Keep in mind, the 28/36 rule isn’t a one-size-fits all debt-to-income predictor. Again, borrowers need to be honest with themselves when it comes to how much mortgage they can really afford. The 28/36 rule is a rule-of-thumb, but borrowers need to take into account future financial changes and obligations, and borrow what feels comfortable, not just what looks good on paper. The other rule-of-thumb: don’t stretch your finances too thin.

How much can you qualify to borrow? Let Priority Lending help you navigate the 28/36 rule.

Finding out how much house you can afford is the most important thing to determine before applying for a mortgage loan. And it shouldn’t be just about what you can afford, but what you feel comfortable paying. At Priority Lending our professional team of brokers and lenders can help you answer these questions and more, and help you get a mortgage payment that makes sense for your situation. Please call us at (800) 405-7941 to get started.