The 28/36 rule, a long-standing guideline for determining home affordability, has been put to the test in recent years. With rising home prices and interest rates, many potential homebuyers are wondering if this rule still holds water
What is the 28/36 Rule?
The 28/36 rule states that you should spend no more than 28% of your gross monthly income on housing costs and no more than 36% on all of your debt, including housing. This rule helps ensure that you don’t overextend yourself financially and can comfortably afford your mortgage payments.
Is the 28/36 Rule Realistic in Today’s Market?
In today’s market, with higher home prices and interest rates, it can be challenging to stay within the 28/36 rule However, it’s still a valuable guideline to consider. Here’s why:
- It helps you avoid overspending: The 28/36 rule helps you set a realistic budget for your home purchase. By sticking to this rule, you’ll avoid taking on more debt than you can comfortably handle.
- It can help you qualify for a mortgage: Lenders often use the 28/36 rule to assess your ability to repay a loan. Staying within these guidelines can increase your chances of getting approved for a mortgage.
- It can save you money in the long run: By keeping your housing costs and debt under control, you’ll have more money available for other expenses, such as retirement savings or unexpected costs.
What if You Can’t Afford to Stay Within the 28/36 Rule?
Even if you are unable to adhere to the 28/36 rule, purchasing a home is still possible. Here are a few options to consider:
- Look for a smaller home: A smaller home will typically have a lower monthly mortgage payment, making it easier to stay within the 28/36 rule.
- Make a larger down payment: A larger down payment will reduce the amount of money you need to borrow, which can help you qualify for a smaller mortgage payment.
- Shop around for a mortgage: Different lenders have different lending criteria. You may be able to find a lender who is willing to approve you for a mortgage even if you don’t meet the 28/36 rule.
- Consider a government-backed loan: Government-backed loans, such as FHA loans and VA loans, often have more flexible lending guidelines than conventional loans.
The Bottom Line
The 28/36 rule is a valuable guideline to consider when buying a home. While it may be challenging to stay within these guidelines in today’s market, it’s still worth aiming for. By following this rule, you can help ensure that you can comfortably afford your mortgage payments and avoid overextending yourself financially.
Additional Resources:
- Bankrate: What is the 28/36 Rule for Buying a Home?
- CNBC Select: What is the 28/36 rule and how can it help you get approved for a mortgage?
- NerdWallet: What is the 28/36 rule?
FAQs
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What Is the 28/36 Rule?
The 28/36 rule is a practical method for determining how much debt a person or household should take on. According to this rule, a household should spend no more than 2036 percent of its monthly gross income on total housing expenses and a maximum of 2028 percent of its monthly gross income on debt servicing. This includes housing and other debt such as car loans and credit cards.
Lenders often use this rule to assess whether to extend credit to borrowers.
- Based on their income, other debts, and lifestyle, a household’s ability to responsibly take on debt is determined by the 28/36 rule.
- The 28/36 rule may be applied by certain customers when creating their monthly budgets.
- Even if a customer isn’t applying for credit right away, adhering to the 28/36 rule can help increase your chances of getting approved for credit.
- Regarding the 28/36 rule, many underwriters have different requirements; some ask for lower percentages, while others ask for higher percentages.
Special Considerations
Before granting any credit, most lenders follow the 28/36 rule, so applicants for any kind of loan should be aware of this requirement. Lenders pull credit checks for every application they receive. These hard inquiries show up on a consumers credit report. A consumer’s credit score may be impacted by making several inquiries in a short amount of time, which could make it more difficult for them to obtain credit in the future.