The 28/36 rule is a basic finance principle that limits the spending of your monthly income and determines how much you should not spend on housing costs and monthly debt payments.

What is the 28/36 rule?, Examples, Pros & Cons

28/36 is a basic approach to managing debt an individual or household should spend. It implies that household spending should not exceed 28% of the gross monthly income and should not be more than 36% of the debt, which includes housing expenses, car loans, and credit card payments. The 28/36 rule is a way to use your monthly income within a reasonable limit.

The 28/36 rule is a basic finance principle that limits the spending of your monthly income and determines how much you should not spend on housing costs and monthly debt payments.

It is best used while planning a monthly budget.

How does the 28/36 rule work?

It is one of the factors that lenders use to approve the loan for you. The income and debt-to-income ratio help the lender understand your ability to manage the loan and repayments.
If you pass the rule, you will most likely have a loan.

  1. Rule 28 or front-end ratio:  The repayment of housing costs should not go beyond the limit of 28% of your monthly income. The housing costs include PITI ratios, which include principle, interest, taxes, and insurance. The utility bills are not part of the front-end ratio.

  2. Rule 36, or back-end ratio: More than 36% of your gross monthly income should not be consumed by total debts and loan payments. It is also called the debt-to-income ratio. The rule considers housing payments and other loans like credit cards, student loans, car loans, alimony, and child support. 

A few examples of the 28/36 rule

You make $96,000 per year. It makes your monthly income $8000, a pre-taxed income. Following the 28/36 rule, you spend not more than $2,240 on housing costs and debt payments. If you rent an apartment costing $1,000 per month, you can save $1,240 per month for other debt payments.

Pros and cons of the 28/36 rule

The 28/36 rule is designed to save cash for an individual. 

Pros of Rule 28/36

  1. The rule helps an individual get a loan quickly at a reasonable interest rate.
  2. It can help an individual save enough money for debt payments and save more in the long term.
  3. It helps lenders assess the ability of an individual to manage the loan and other debts.

Cons of Rule 28/36

  • It does not include other household expenses like utility bills, groceries, etc.
  • Many people exceed the given limit due to inflation and wages, high mortgage rates, etc., and hence, not everyone fits the rule.
  • Despite exceeding the limit of 36%, if your credit score remains ideal, you can get your loan approved, as your credit score is the first determining factor.

What can you do if you exceed the 28/36 rule?

  1. If you exceed the 28/36 rule, you spend more than your income. It shows your inability to manage your finances, and you are on the wrong side of getting the loans approved.
  2. If you exceed the 28/36 rule, reduce your debt loan and try to pay higher interest rates.
  3. If you want to have a loan, make 20% of the loan amount as a downpayment.

Final words

The 28/36 rule allows individuals to allocate not more than 28% and 36% of their gross income for housing costs and debt payments. It is a criterion used by the lender to assess whether a person is qualified for a loan or not.

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02 Nov, 2023

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