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. Debt Service

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

    In corporate finance, it is the amount of cash flow available ...
  3. Credit Report

    A detailed report of an individual's credit history prepared ...
  4. Credit Score

    A statistically derived numeric expression of a person's creditworthiness ...
  5. Debt Avalanche

    A method that involves making the minimum payment on each debt, ...
  6. Debt Snowball

    A method of debt repayment in which debtors pay off their smallest ...
Related Articles
  1. What's On A Consumer Credit Report? ...
    Credit & Loans

    What's On A Consumer Credit Report? ...

  2. The Importance Of Your Credit Rating
    Credit & Loans

    The Importance Of Your Credit Rating

  3. How Credit Cards Affect Your Credit ...
    Credit & Loans

    How Credit Cards Affect Your Credit ...

  4. Understanding Credit Card Interest
    Retirement

    Understanding Credit Card Interest

Hot Definitions
  1. Gross Rate Of Return

    The total rate of return on an investment before the deduction of any fees or expenses. The gross rate of return is quoted ...
  2. Debit Spread

    Two options with different market prices that an investor trades on the same underlying security. The higher priced option ...
  3. Leading Indicator

    A measurable economic factor that changes before the economy starts to follow a particular pattern or trend. Leading indicators ...
  4. Wage-Price Spiral

    A macroeconomic theory to explain the cause-and-effect relationship between rising wages and rising prices, or inflation. ...
  5. Accelerated Depreciation

    Any method of depreciation used for accounting or income tax purposes that allows greater deductions in the earlier years ...
  6. Call Risk

    The risk, faced by a holder of a callable bond, that a bond issuer will take advantage of the callable bond feature and redeem ...
Trading Center