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. Satisfaction And Release

    Formal paperwork stating that a consumer has paid the full amount ...
  6. Stipulated Judgment

    A court order that requires one party to pay another party a ...
RELATED FAQS
  1. How can I use quantitative analysis to evaluate investment decisions if I don't have ...

    While there are a few legitimate companies advertising that they can consolidate credit card debt, most are illegitimate ... Read Full Answer >>
  2. What are some common models that practitioners use in quantitative analysis of equity ...

    Credit cards can be a helpful component in reaching a financial goal or financing some of life's bigger expenses. Carrying ... Read Full Answer >>
  3. How can I use the correlation coefficient to predict returns in the stock market?

    Simple interest is most commonly seen in short-term loans, such as those from payday lenders or pawn shops. You might see ... Read Full Answer >>
  4. What is the difference between secured and unsecured debt?

    The difference between secured and unsecured debt is the presence or absence of collateral backing. Secured Debt For a debt ... Read Full Answer >>
  5. What are some examples of debt instruments?

    Individuals, businesses and governments use common types of debt instruments, such as loans, bonds and debentures, to raise ... Read Full Answer >>
  6. What are the differences between debit cards and credit cards?

    Debit cards and credit cards work in similar ways. Both carry the logo of a major credit card company, such as Visa or MasterCard, ... 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. Retirement

    The Purpose Of Having A Social Security Number

    When (and why) it is necessary to use the nine-digit number the United States government issues to individuals and when you should avoid it.
  9. Retirement

    Steps To Replace Or Update Your Social Security ID

    Investopedia's step-by-step guide to filling out the form that gets you a new or replacement Social Security card.
  10. 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.

You May Also Like

Hot Definitions
  1. Yield Curve

    A line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity ...
  2. Productivity

    An economic measure of output per unit of input. Inputs include labor and capital, while output is typically measured in ...
  3. Variance

    The spread between numbers in a data set, measuring Variance is calculated by taking the differences between each number ...
  4. Terminal Value - TV

    The value of a bond at maturity, or of an asset at a specified, future valuation date, taking into account factors such as ...
  5. Rule Of 70

    A way to estimate the number of years it takes for a certain variable to double. The rule of 70 states that in order to estimate ...
  6. Risk Premium

    The return in excess of the risk-free rate of return that an investment is expected to yield. An asset's risk premium is ...
Trading Center