This Is How Much of Your Income Should Go Toward Housing, According to the 28/36 Rule

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The first rule of home buying: don’t buy a house you can’t afford.

Breaking this rule can have serious implications for your finances, says Steven Podnos, CEO of WealthCare, a Florida-based financial planning and wealth management company. Going against his advice, Podnos says he once worked with a client who bought a house they only later realized was too expensive . 

“Sometimes people get in over their heads and become house-poor,” says Podnos. This means “spending so much to maintain your housing that you don’t have money for other things, such as entertainment, vacations, and saving for the future,” he continued. “The house literally drains you of income.”

The current real estate market is hyper-competitive. “Today’s housing market is characterized by scarcity,” says Zillow’s principal economist Chris Glynn. “Competition amongst buyers for a relatively limited supply of homes is intense, and home prices are reflecting strong demand,” says Glynn.  

This competition, combined with mortgage rates experts expect to increase throughout the year, has the potential to push buyers to act quickly.

But before entering the red-hot housing market, it’s important to understand what portion of your income should go toward your mortgage. This will give you a better idea how much of your income is left for your other expenses. 

A Critical Number For Homebuyers

One way to decide how much of your income should go toward your mortgage is to use the 28/36 rule. According to this rule, your mortgage payment shouldn’t be more than 28% of your monthly pre-tax income and 36% of your total debt. This is also known as the debt-to-income (DTI) ratio

Pro Tip

When calculating your 28/36 rule, only count your reliable income, not your potential income growth, over-time money, or side hustle income. 

This metric is critical to budgeting your home affordability and a good indicator of financial health. It tells the lender how much debt a borrower can realistically take on. “When housing costs exceed 30% of income, the household is said to be cost-burdened,” says Glynn. 

Lenders don’t want to get stuck with a foreclosed home because the borrowers couldn’t pay their mortgage, says Jonathan Gassman, CEO and founder of The Gassman Financial Group, a New York City-based public accounting firm. “They want to see some cushion in terms of affordability.” Financial lenders will run the same calculations meticulously before deciding to lend to you, says Gassman.

The 28% Front-End Ratio

The 28% number is also called the front-end ratio. It’s the total cost of housing divided by your total monthly income. Total cost of housing includes mortgage loan payment, interest, property taxes, insurance, and HOA fees, excluding utilities.

Here is an example:

Mortgage payment (plus interest)$1,000
Property taxes$150
Homeowners insurance$100
HOA fees$50
Total monthly housing cost$1,300
Total family monthly income $4,700
Front-end ratio27.65%

Divide the total monthly housing cost ($1,300) by the total monthly income ($4,700) to reach the 27.65% front-end ratio. 

The 36% Back-End Ratio

The second half of the rule is the back-end ratio, also known as the debt-to-income ratio. This is calculated by taking your total monthly debt and dividing it by your monthly income. According to the 28/36 rule, lenders prefer the back-end ratio to be less than 36%.

The back-end ratio includes housing costs and adds that to existing debts such as car loans, credit cards, school loans, personal loans, etc. If you pay $1,300 for housing, then add all your other debts and divide by your monthly income to get the back-end ratio.

Here’s an example:

School loans$150
Car payment$250
Credit card $50
Total monthly housing cost$1,300
All debts (+housing)$1,750
Total family monthly income $4,700
Back-end ratio37.23%

Divide the total debt, including housing ($1,750), by income ($4,700) to get the back-end ratio of 37.23%.

Based on this example, the front-end ratio is 27.65%, just under the 28%. And the back-end ratio is 37.23%, just above the 36%. 

Costs Can Add Up Quickly

There are other costs to consider when considering the total cost of homeownership.

Data from the real estate website Clever estimates the average homeowner spends more than $13,000 a year on their homes, excluding their mortgage. For example: 

  • $2,676 on maintenance and repairs
  • $6,649 on home improvements

According to HomeAdvisor, there are several big-ticket items homebuyers need to include in their budgets, and particularly for older properties.

  • Homes will need a new roof every 20 years or so, and reroofing a house costs an average of $8,226. 
  • Air conditioners have to be replaced every 10 to 15 years at an average cost of $5,638. 
  • Septic systems last around 40 years and can cost as much as $10,000 to replace.

For first-time homeowners, these additional costs can come as a shock, according to Daniel Goldstein, an agent with Keller Williams Capital Properties in Bethesda, Maryland. Some homeowners will be surprised when they realize they need a new lawnmower, a new washer and dryer, because they didn’t realize the house didn’t come with them, says Goldstein. 

Buy What You Can Afford

Indeed, temptations abound for borrowers to overspend on a house given the tight inventories, which some borrowers may find difficult to ignore.

“Don’t count on income growth to help you grow into that payment to get used to it,” said Goldstein. “If you are anticipating getting that $500-a-week extra income from your side job or your overtime and it disappears, you’re really in trouble.”

“Don’t go into this with your eyes bigger than your stomach when it comes to your appetite for borrowing,” says Bruce McClary, senior vice president of communications at the National Foundation for Credit Counseling (NFCC). 

The bigger the home and loan, the bigger the commission a realtor or mortgage broker will make. 

“It’s great if you get approved for something that might be beyond the calculation of 28% of your monthly income,” says McClary.  “There may be people who might try to convince you that you can still afford that.” That’s why McClary urges consumers to contact a HUD-approved housing counselor. They are sponsored by the U.S.Department of Housing and Urban Development (HUD) and will give free home buying advice and the reality check you may need to hear.