What is the 28/36 Mortgage Rule and How Can It Help You Get Approved for a Mortgage?

Is this homebuying rule of thumb still realistic?

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

In this article, we’ll dive deep into the 28/36 rule, exploring its meaning, its practicality in today’s market, and what you should do if you find yourself exceeding its limits

Understanding the 28/36 Rule

The 28/36 rule is a simple yet powerful tool for gauging your affordability when it comes to taking on a mortgage It essentially sets two key limits:

• 28% of your gross monthly income can be allocated towards housing costs. This includes your mortgage payment, property taxes, homeowners insurance, and HOA fees.
• 36% of your gross monthly income can be dedicated to your total debt obligations. This encompasses your housing costs, credit card bills, auto loans, student loans, personal loans, alimony, and child support payments.

Let’s illustrate this with an example. Imagine your gross monthly income is $6,000. The 28/36 rule suggests that you can safely spend up to $1,680 on housing and up to $2,160 on all of your bills. Remember, these are ceilings, not targets. You shouldn’t necessarily aim to spend the maximum amount.

Is the 28/36 Rule Realistic in Today’s Market?

While the 28/36 rule serves as a helpful guideline, it’s important to acknowledge that it’s not a rigid mandate. Lenders consider a variety of factors beyond this rule when assessing your mortgage eligibility.

Moreover, many prospective homeowners may find the 28/36 rule to be a little unrealistic given the recent notable increase in property values and stagnant wages.

For instance, according to a report from bill pay site Doxo, the average monthly mortgage payment in early 2024 was $1,402. To adhere to the 28/36 rule with this payment, you would require a gross monthly income of $5,392, translating to an annual income of $64,704. However, the U.S. Bureau of Labor Statistics reports that the average annual salary in the fourth quarter of 2023 was $4,949, or $59,384 per year.

This apparent discrepancy highlights the potential challenges of adhering to the 28/36 rule in today’s market. However, it’s crucial to remember that some lenders are more flexible with their requirements. For example, Navy Federal Credit Union doesn’t have a minimum credit score requirement. Instead, they work with applicants to find the right mortgage fit for their individual circumstances.

Furthermore, initiatives such as CitiMortgage’s HomeRun program enable borrowers to apply with as little as 3% down payment. This is especially advantageous because it eliminates the need for private mortgage insurance, which is normally necessary with a down payment this small. This can lead to significant savings on your annual housing costs.

What to Do If You Exceed the 28/36 Rule

If you find yourself exceeding the 28/36 rule’s limits, don’t despair. There are steps you can take to improve your chances of mortgage approval:

1. Reduce Your Debt Load:

Focus on paying down your existing debt before applying for a mortgage. Take into account using techniques such as the avalanche method, which pays off the debt with the highest interest rate first, or the snowball method, which pays off the smallest balance first.

2. Improve Your Credit Score:

Your credit score plays a crucial role in determining your mortgage eligibility. By keeping your credit utilization low, paying your bills on time, and refraining from opening new credit accounts, you can work to raise your credit score.

3. Consider a Smaller Down Payment:

If you can’t reduce your debt load significantly, consider making a smaller down payment. However, remember that this may result in higher monthly payments and the need for private mortgage insurance.

4. Explore Different Loan Options:

Various loan options might be available depending on your circumstances. For instance, FHA loans require a lower down payment than conventional loans, while VA loans don’t require a down payment at all for eligible borrowers.

The 28/36 rule is a valuable tool for understanding your affordability when it comes to taking on a mortgage. However, it’s essential to remember that it’s not a rigid rule and that lenders consider various factors beyond this guideline.

If you find yourself exceeding the 28/36 rule, don’t be discouraged. You can raise your chances of getting approved for a mortgage and realize your dream of becoming a homeowner by taking action to pay down debt, raise your credit score, and investigate your options for loans.