What is the 28/36 Rule?
The 28/36 rule is a common sense rule for calculating the amount of debt an individual or household should take on. The 28/36 rule states that a household should spend a maximum of 28% of its gross monthly income on total housing expenses, and should spend no more than 36% on total debt service, including housing and other debt such as car loans.
Mortgage lenders and other creditors use this rule to assess borrowing capacity, the premise being that debt loads in excess of the 28/36 parameters are likely difficult for an individual or household to sustain and may eventually lead to default.
Understanding the 28/36 Rule
The 28/36 rule is important for individuals to be aware of when applying for all types of credit. The 28/36 rule is a standard most lenders use in addition to a borrower’s credit score. The underwriter pulls all the data used to arrive at a credit decision from a borrower’s credit record on file with a partnering credit data agency.
An individual’s credit score is often a primary factor involved with the approval of a credit application. Lenders often require that a credit score falls within a certain range before considering credit approval. However, a credit score is not the only consideration. Lenders also consider a borrower’s income and debt to income ratios.
The 28/36 rule is a guide lenders use to structure underwriting requirements. Some lenders may vary these parameters based on a borrower’s credit score, potentially allowing high credit score borrowers to have slightly higher debt to income ratios.
Lenders using the 28/36 rule in their credit assessment may include questions about housing expenses and comprehensive debt accounts in their credit application. Each lender establishes their own parameters for housing debt and total debt as a part of their underwriting program.
Important: Most traditional lenders require a maximum household expense-to-income ratio of 28% and a maximum total debt to income ratio of 36% for loan approval. This means that household expense payments, primarily rent or mortgage payments, can be no more than 28% of monthly or annual income. Similarly, total debt payments cannot exceed 36% of income.
Example of the 28/39 Rule
For an individual, or a family, who brings home a monthly income of $5,000, if they want to adhere to the 28/36 rule, they could budget $1,000 for a monthly mortgage payment and housing expenses. This would leave an additional $800 for making other types of loan repayments.
Some consumers may use the 28/36 rule as a consideration when planning their monthly budget.
Whether or not a consumer is currently seeking additional credit, following the 28/36 rule parameters while budgeting can help to improve chances of credit approval.
Many underwriters vary their parameters around the 28/36 rule, with some underwriters requiring lower percentages and some requiring higher percentages.