28/36 Rule

AAA

DEFINITION of '28/36 Rule'

A rule-of-thumb for calculating the amount of debt that can be taken on by an individual or household. The 28/36 Rule states that a household should spend a maximum of 28% of its gross monthly income on total housing expenses and no more than 36% on total debt service, including housing and other debt such as car loans. This rule is used by mortgage lenders and other creditors to assess borrowing capacity, the premise being that debt loads in excess of the 28/36 yardstick would be difficult for an individual or household to service and may eventually lead to default.

INVESTOPEDIA EXPLAINS '28/36 Rule'

For example, an individual with a monthly income of $5,000 who adheres to the 28/36 Rule would be able to spend a maximum of $1,400 on monthly housing expenses, which would include mortgage payments, home insurance, property taxes and other housing-related expenses, such as condo fees. An additional $400 would be available for other debt such as credit card expenses and car loans.

RELATED TERMS
  1. Credit Score

    A statistically derived numeric expression of a person's creditworthiness ...
  2. Credit Report

    A detailed report of an individual's credit history prepared ...
  3. Debt Service

    The cash that is required for a particular time period to cover ...
  4. Debt-Service Coverage Ratio - DSCR

    In corporate finance, it is the amount of cash flow available ...
  5. Deadbeat

    A slang term for a credit card user who pays off his or her balance ...
  6. Skip Tracer

    A professional who tracks down individuals who don’t want to ...
RELATED FAQS
  1. Does shopping for the best interest rate affect my credit score?

    Shopping for interest rates does not necessarily affect a person's credit score. When a borrower submits an application to ... Read Full Answer >>
  2. How often is interest compounded?

    Interest can be compounded on any given frequency schedule. Common interest compounding time frames are daily, monthly, semi-annually ... Read Full Answer >>
  3. What are the pros and cons of getting installment credit to pay off your revolving ...

    Whether it is to finance big-ticket items, cover unplanned emergency expenses or provide a monetary cushion when cash flow ... Read Full Answer >>
  4. What does it mean when interest "accrues daily?"

    In financial terminology, "accrues" means the same thing as "accumulates." Interest is considered accrued when it is added ... Read Full Answer >>
  5. When did people first start using collateral to secure loans?

    The history of lending, particularly non-money lending, is not well documented. It is widely believed among financial historians ... Read Full Answer >>
  6. How can I tell if a loan uses simple or compound interest?

    When analyzing the terms of a loan, it is important to consider more than the interest rate. Two loans can have identical ... Read Full Answer >>
Related Articles
  1. Credit & Loans

    What's On A Consumer Credit Report?

    A look at the various components and considerations that go into one's credit report and credit score.
  2. Credit & Loans

    The Importance Of Your Credit Rating

    A great starting point for learning what a credit score is, how it is calculated and why it is so important.
  3. Credit & Loans

    How Credit Cards Affect Your Credit Rating

    The average American household has four cards, but does that mean more is better?
  4. Retirement

    Understanding Credit Card Interest

    Paying these rates can impact your disposable income and your investment returns.
  5. Credit & Loans

    Digging Out Of Personal Debt

    Find out why good intentions can put consumers in an even bigger hole than before.
  6. Options & Futures

    Home-Equity Loans: What You Need To Know

    We shed light on why consumers decide to use this form of debt and whether it is a good alternative.
  7. Options & Futures

    Top 7 Most Common Financial Mistakes

    Choose fortune over disaster by avoiding these money traps.
  8. Credit & Loans

    The Pros & Cons Of Personal Loans vs. Credit Cards

    One is not like the other. We help you decide where to borrow money from.
  9. Entrepreneurship

    What Is Microlending And How Does It Work?

    Microlending can produce great return on investment for the lender while benefiting borrowers who wouldn't otherwise secure funding.
  10. Credit & Loans

    Borrowing From LendUp: Better Than A Payday Loan?

    A new alternative to conventional payday loans is being offered in 16 states. How much better for consumers is LendUp really? Read on for details.

You May Also Like

Hot Definitions
  1. Venture-Capital-Backed IPO

    The selling to the public of shares in a company that has previously been funded primarily by private investors. The alternative ...
  2. Merger Arbitrage

    A hedge fund strategy in which the stocks of two merging companies are simultaneously bought and sold to create a riskless ...
  3. Market Failure

    An economic term that encompasses a situation where, in any given market, the quantity of a product demanded by consumers ...
  4. Unsystematic Risk

    Company or industry specific risk that is inherent in each investment. The amount of unsystematic risk can be reduced through ...
  5. Security Market Line - SML

    A line that graphs the systematic, or market, risk versus return of the whole market at a certain time and shows all risky ...
  6. Tangible Net Worth

    A measure of the physical worth of a company, which does not include any value derived from intangible assets such as copyrights, ...
Trading Center