Ever found the perfect home… then panicked trying to figure out if you could afford it? You’re not alone. For most first-time buyers, the mortgage world is a maze of numbers, ratios, and rules that sound more complicated than they are. Don’t let confusion keep you stuck in the mathematically simple world of renting; read along and we’ll break it all down for you.
One of the most important (and often misunderstood) guidelines is the 28/36 rule—a simple formula lenders use to determine how much house you can afford. But here’s the thing: this rule doesn’t just help banks—it’s also a powerful personal finance tool you can use to avoid overextending yourself.
In this guide, you’ll learn:
The 28/36 rule is a mortgage affordability rule used by lenders to gauge your financial ability to repay a home loan. Your housing expense should not exceed 28% of your gross monthly income. This includes property taxes, insurance, HOA fees, as well as your mortgage payment. Your total monthly debt should not exceed 36% of your gross monthly income. This includes your mortgage, plus your student loans, car payment, credit cards, etc.
In lender lingo:
28% = Front-End Ratio (Housing Expense Ratio)
36% = Back-End Ratio (Total Debt-to-Income Ratio)
This rule is a form of “debt-to-income ratio” (DTI), a key mortgage qualification factor. These ratios are grounded in decades of lending practice—originating from guidelines set by Fannie Mae and Freddie Mac. They aim to protect you from borrowing more than you can handle.
Stay with us here! Now we’ll walk through some examples of how to calculate the front-end ratio. Remember, this one is only about your housing expenses. And here’s a quick tip–before you fall in love with a house, make sure you know every single expense required. Flood insurance and HOA dues discovered at the last minute have killed more than a few deals at the 11th hour by pushing a buyer’s DTI (that’s debt to income!) ratio over the edge.
If a buyer isn’t putting a 20% down payment on a loan, PMI, or Private Mortgage Insurance, will be required. To learn more about PMI, read up on Chase Bank’s guide to PMI. PMI drops off once your loan balance reaches 78% of the original purchase price. To request early cancellation if you think you have enough equity in the home, reach out to your lender. Here’s a guide on PMI cancellation.
While homeowners insurance will always be required, flood insurance is only required if your home is in a flood zone. Use FEMA’s flood maps to run properties through to see if insurance is required; if so, ask your Realtor to obtain the flood policy from the sellers.
Here’s a scenario:
Annual income: $50,000
Monthly gross income: $4,166
Max housing cost: $1,166
To arrive at this calculation, multiply your monthly gross income by .28. There are many mortgage calculators available online as well.
Now that you’re an expert at calculating your front-end ratio, let’s build on that by understanding your back-end ratio. That’s the other half of the 28/36 rule: your total monthly debts should not exceed 36% of your gross monthly income.
A high back-end ratio can disqualify you from a loan, even if your housing costs are reasonable. Lenders take into account your housing costs, plus any credit card minimum payments, student loans, car notes, child support, and other monthly debt obligations. (Cost of living expenses, like groceries, utilities etc. are not included in this calculation. This is only your recurring monthly debt to creditors.)
Here’s a scenario:
Annual income: $75,000
Monthly gross income: $6,250
Housing cost: $1,750
Other debts: $750
Back-end ratio: 40%
To arrive at this calculation, calculate your total monthly debts, divide it by your gross monthly income, and multiply x 100. In this case, $1,750 + $750 = $2,500 / $6,250 = .4 x 100 = 40%. The back end ratio exceeds the 36%, so the buyer would not qualify for the loan. If the total monthly debts in this situation were $500, though, it would equal exactly 36%.
The 28/36 rule is ideal for first-time homebuyers with straightforward, steady income, and buyers with little to no additional debts. The more complicated a buyer’s finances, the less likely this rule is to work for them.
Here’s a scenario:
A couple making a combined income of $100,000, with no student loans and $1,500 in monthly housing expenses would have ratios of 18%/18%—well within guidelines. They’re likely to qualify easily and maintain long-term financial health.
While 28/36 is a useful baseline, it’s not rigid. Some buyers may qualify outside these numbers depending on:
Most seasoned mortgage brokers will agree, though, that the 28/36 rule is a conservative benchmark—but it’s not the law of the land. Your full financial picture matters more.
Another commonly used rule when it comes to budgeting is the 50/30/20 system, which recommends allocating 50% of your after-tax income to needs, 30% to wants, and 20% toward debt repayment and savings. This is a simple and structured approach to budgeting. Let’s define each of these.
This method is flexible, too. If you want to adjust these percentages to pay down debt more aggressively, or if you don’t have much debt and want to save for a vacation, do so at your discretion. The key here is to make sure not to exceed the 50% allocation for needs.
Another general guideline when it comes to mortgage lending is that a borrower can afford two to three times their annual income. So if a couple makes a combined $100k annually, they can afford a house price of about $300k. Exceptions to this rule are if a couple has significant savings, strong credit scores or other compensating factors. The flip side to that is also a consideration–low credit scores, minimal job history, little to no savings–these are all things that will be weighed against a borrower’s loan qualification.
Above all, be sure to assess your own level of comfort with taking on a loan. Even if you are qualified for a high mortgage amount, are you comfortable with that? Maybe you’re on a path to save and invest aggressively to retire early; or maybe you’re a jetsetter used to a change of scenery every couple of months. To avoid becoming “house poor,” ask yourself: can I still afford to save for retirement? Can I still maintain my lifestyle?
The 28/36 rule mortgage guideline is one of the simplest and most helpful tools for assessing how much house you can afford—and it’s not just for lenders. Whether you’re a first-time homebuyer, a financial planner, or simply exploring your options, knowing these ratios can keep your budget (and your stress levels) in check.
Q: What happens if I exceed 36% DTI?
A: You may be denied a conventional loan or offered a smaller mortgage amount.
Q: Is the 28/36 rule the law?
A: No—it’s a lending guideline. Many loans, like FHA or VA, allow higher ratios.
Q: Does it count gross or net income?
A: It uses gross income (before taxes).
Q: What if I have irregular income?
A: You may need to show two years of average income or use a more conservative rule of thumb.
