When applying for a mortgage, homebuyers need to figure out how much they can afford. Lenders often use an industry standard known as the "28/36 rule" to determine what size loan a borrower can handle.
Below, CNBC Select looks into this real estate rule of thumb to see what it means, whether its manageable and what you should do if you go over.
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What is the 28/36 rule?
According to the 28/36 rule, you should spend no more than 28% of your gross monthly income on housing and no more than 36% on all debts.
Housing costs can include:
- Your monthly mortgage payment
- Homeowners Insurance
- Private mortgage insurance
- HOA fees and other payments
Other forms of debt besides your mortgage which factor into the "36" portion of the rule include credit card bills, auto loans, student loans, personal loans, alimony and child support payments.
If your gross monthly income is $6,000, the 28/36 rule says you can safely spend up to $1,680 on housing and up to $2,160 on all of your bills. Of course, that doesn't mean that you should spend to the maximum — it's a ceiling.
Is the 28/36 rule realistic?
Since lenders look at a variety of factors, the 28/36 rule isn't necessarily a hard-and-fast mandate. When you consider how much property values have increased in recent years, even wages have stagnated, the rule may feel unrealistic.
The average monthly mortgage payment was $1,402 at the start of 2024,, according to a report from bill pay site Doxo. To keep to the 28/36 rule, that would require a gross monthly income of $5,392, or $64,704 a year.According to the U.S. Bureau of Labor Statistics, the average U.S. annual salary in the fourth quarter of 2023 was $4,949, or $59,384 a year.
Some lenders are more flexible with their requirements. Navy Federal Credit Union doesn't require a minimum credit score, for example. Instead, it works with applicants to find a mortgage that's right for them.
Navy Federal Credit Union
Annual Percentage Rate (APR)
Apply online for personalized rates
Types of loans
Conventional loans, VA loans, Military Choice loans, Homebuyers Choice loans, adjustable-rate mortgage
Terms
10 – 30 years
Credit needed
Not disclosed but lender is flexible
Minimum down payment
0%; 5% for conventional loan option
Terms apply.
Citi Bank's HomeRun program allows borrowers to apply with as little as 3% down. Normally a down payment that low would require private mortgage insurance, but Citi waives the insurance (which can cost up to 2% of your loan amount) for HomeRun borrowers. That could shave hundreds off your housing costs every year.
CitiMortgage®
Annual Percentage Rate (APR)
Apply online for personalized rates
Types of loans
Conventional loans, FHA loans, VA loans and Jumbo loans
Terms
15 – 30 years
Credit needed
580
Minimum down payment
3%
Terms apply.
What to do if you exceed the 28/36 rule
If you find that you're spending more on repaying debt than the rule suggests, try to reduce your debt load before applying for a mortgage.
There are many ways to pay down debt quickly. The snowball method involves paying off your smallest balance first and working your way up to the largest balance. With the avalanche method, you pay off the debt with the highest interest rate first and work your way down to the lowest interest rate.
Your debt load isn't the only criteria that lenders use to judge whether you're able to take on a mortgage debt. Your credit score is one of the largest indicators lenders use to approve borrowers. A higher credit score indicates that the borrower is less likely to default than someone with a lower credit score.
Bottom line
Like any conventional wisdom, the 28/36 rule is only a guideline, not a decree. It can help determine how much of a house you can afford, but everyone's circ*mstances are different and lenders consider a variety of factors.
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Editorial Note: Opinions, analyses, reviews or recommendations expressed in this article are those of the Select editorial staff’s alone, and have not been reviewed, approved or otherwise endorsed by any third party.
