The 28/36 rule explained: what lenders let you spend on housing

Before a lender looks at the house, it looks at your income. The question it asks is simple: how much of what you earn would the new payment take? The 28/36 rule is the classic US answer, and once you see how its two limits interact, it is easy to tell what really caps your budget.

The two ratios

The front-end ratio (28%) covers housing alone: mortgage principal and interest, property tax, home insurance and HOA dues, as a share of your gross monthly income.

The back-end ratio (36%) covers housing plus every other regular debt payment: car loans, student loans, minimum card payments. Rent you pay today, utilities and groceries do not count.

Both are measured against income before tax. Whichever limit leaves the smaller housing payment is the one that binds.

A worked example

Take a household earning $96,000 a year, or $8,000 a month before tax, with $60,000 saved for the down payment. The front-end limit is 28% of $8,000, or $2,240 a month for housing. The back-end limit is 36%, or $2,880, minus their other debts.

With a $500 car payment, the back-end rule leaves $2,380 for housing. That is more than $2,240, so the 28% rule is the one that binds. At a 6.5% rate over 30 years, with property tax at 1.1% of the price and $1,800 a year of insurance, a $2,240 payment supports a home of about $341,000: about $1,777 of mortgage, $313 of tax and $150 of insurance.

The $60,000 down payment is under 20% of that price, so a lender would normally also charge private mortgage insurance (PMI). The example leaves it out; including it would lower the price a little further.

Now raise the other debts to $900 a month. The back-end rule leaves only $1,980 for housing, which is now the tighter limit. The affordable price drops to about $305,000. An extra $400 a month of debt cost about $36,000 of house.

What moves the answer

Existing debts. When the back-end ratio binds, every monthly payment you already owe comes straight off your housing budget. Paying off a small loan before applying can raise the price you qualify for more than a raise would.

The mortgage rate. Your income fixes the payment, so a higher rate leaves less of it to repay the price. In the first example, the same household could afford about $369,000 at 5.5% but only about $317,000 at 7.5%.

Property tax and insurance. They count inside the 28%, so a high-tax area or an expensive insurance market lowers the price even at the same income and rate.

The down payment. Savings add to the price directly: they buy house without adding to the payment.

US lenders often allow more than 36%

The 28/36 rule is a US guideline, not a law. In the US, many lenders accept total debt ratios of 43% or more for strong applicants, and some loan programs go higher. Other countries set their own limits: in France, for example, lenders must generally keep all loan payments, insurance included, within 35% of income. You can set your own lender’s ratios in the calculator’s advanced options. But raising the back-end limit only helps when it is the one that binds. In the first example, moving it from 36% to 43% changes nothing, because the 28% housing limit was already lower.

A higher approval is also not a reason to borrow more. Lenders do not see childcare, saving for retirement, or the repairs every house needs. Treat the 28/36 result as a ceiling, and check that the full payment still leaves room for the rest of your life.

What the rule leaves out

Private mortgage insurance, usually charged when the down payment is under 20%, adds to the monthly payment and lowers the price you can afford. Closing costs are paid in cash at purchase, so keep them out of the savings you count as a down payment. And because the rule uses pre-tax income, the same payment takes a larger share of what actually reaches your account.

Find your own limit with the home affordability calculator, check the full payment in the mortgage calculator, and see whether buying beats renting in rent vs. buy: why the answer depends on how long you stay.