Understanding Your Home-Buying Budget: The 28/36 Rule
Before starting your house hunt, it’s essential to have a clear understanding of your budget. One popular strategy to determine your price range is the “28/36 rule.” This guideline helps you calculate how much you can afford to pay monthly on your mortgage payment.
What is the 28/36 Rule?
The 28/36 rule states that you should spend no more than 28% of your gross monthly income on housing costs (your monthly mortgage payment) and a maximum of 36% on all your debts. This includes your mortgage payment, student loan payment, car payment, credit card minimums, and any other debt you pay off monthly.
How to Apply the 28/36 Rule
Let’s consider an example. If you and your spouse make $120,000 per year, or $10,000 monthly in gross income, you could allot:
- $2,800 per month on your monthly mortgage payment (0.28 x $10,000 = $2,800)
- $3,600 per month on your total debt payments (0.36 x $10,000 = $3,600)
Using a mortgage calculator, you could determine that you could afford a house of about $450,000 with these thresholds and an estimated mortgage rate of 6.75%.
The 28/36 Rule and Debt-to-Income Ratio
The 28/36 rule is another way of breaking down your debt-to-income ratio (DTI), which reflects how much of your monthly income goes toward debt payments. To calculate your DTI, divide your gross monthly debts by your gross monthly income.
Improving Your DTI
If you’re not satisfied with your DTI or worry about qualifying for a loan, there are steps you can take:
- Pay down your debts to free up more income for your mortgage payment
- Increase your income to lower your DTI
- Delay buying a home to allow time for debt reduction or income growth
- Adjust your home search to find more affordable options
- Consider bringing in a co-buyer to improve your financial situation
- Seek personalized guidance from a loan officer or financial advisor
Understanding Your Home-Buying Power
The 28/36 rule provides a valuable framework for determining your home-buying budget. By understanding how much you can afford to spend on housing costs and total debt payments, you can make informed decisions about your home purchase.
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