The 28/36 rule, and how lenders decide what you can afford

Every mortgage calculator that asks for your income is, under the hood, applying some version of the 28/36 rule. Here's what those two numbers are, where they came from, and how to tell which one is binding for you.

The two ratios

The 28/36 rule is two debt-to-income (DTI) ratios that conventional lenders use to decide the maximum mortgage they'll approve:

• 28% — the front-end ratio. Your monthly housing payment (principal + interest + property tax + insurance + HOA + PMI) shouldn't exceed 28% of your gross monthly income.
• 36% — the back-end ratio. Your total monthly debt (housing + car loans + student loans + credit-card minimums) shouldn't exceed 36% of your gross monthly income.

The tighter of the two is the one that actually constrains you. For people with no other debt, the 28% front-end is the limit. For people carrying student loans or car notes, the 36% back-end almost always binds first.

Why those specific numbers

The 28/36 rule traces back to FHA underwriting guidelines from the 1930s, refined over decades by Fannie Mae and Freddie Mac (the entities that buy most US mortgages). The numbers aren't arbitrary — they were empirically chosen as the thresholds above which mortgage default rates rose sharply in the 1970s–1990s data.

Lenders today don't all use exactly 28/36 — many will go to 31/43 (FHA loans), some up to 50% back-end with strong compensating factors (large down payment, high credit score, cash reserves). But 28/36 remains the conservative baseline, and the higher numbers are what get advertised as "qualifying" while still being a stretch.

What goes in PITI

The 28% front-end isn't just principal and interest. It's PITI plus:

• Principal — paying down what you borrowed
• Interest — what the bank charges
• Taxes — property tax, ~1.1% of home value annually in the US average (varies wildly by state)
• Insurance — homeowner's, ~$1,500/year average
• + HOA — homeowner association fees if applicable
• + PMI — private mortgage insurance, required if your down payment is under 20%

For a $400k home in a 1.1% tax state with 10% down, PMI applies. Even at a "low" mortgage rate, taxes + insurance + PMI can add $700/month on top of P&I — and that whole stack is what the 28% rule applies to.

Worked example

Annual income: $100,000 → monthly $8,333.

• 28% × $8,333 = $2,333 — max housing payment (PITI)
• 36% × $8,333 = $3,000 — max total debt

If you have a $400/mo car loan and $200/mo student loans = $600 in other debt, your max housing payment under the back-end is $3,000 − $600 = $2,400. That's just above the front-end cap of $2,333, so the front-end binds — you can afford a payment around $2,333.

Now imagine the same income but $1,000/mo in other debt. Max housing under back-end: $3,000 − $1,000 = $2,000. Below the front-end cap. The back-end binds, and you'd qualify for a smaller house.

What the rule is good for

The 28/36 rule answers "what will a lender approve?" Not "what should I actually borrow?"

Most financial advisors recommend tighter targets — 25% of gross or 30% of net for housing. That leaves room for retirement contributions, emergency funds, and the inevitable surprise expense. A lender's approval is permission, not advice.

The most common mistake is treating the 28/36 maximum as the target. People buy at the top of their pre-approval, then discover that "house-poor" is a real condition: the mortgage gets paid, but everything else (vacations, dining, savings) gets squeezed to nothing.

Where it falls short

• It uses gross income, not net. A high-tax state takes 35% off the top. The 28% looks generous against a $100k gross, less generous against a $65k take-home.
• It ignores fixed expenses that aren't "debt." Daycare ($1,200–$2,000/mo per kid), health insurance, supporting parents — none counted.
• It assumes 30 years of stable income. A freelancer with a great current year might qualify but face years of lumpy income that strain a fixed payment.
• It doesn't know about your savings rate. You can hit the 28/36 by minimizing 401(k) contributions, but doing that for a mortgage is rarely worth it.

Quick decision rules

• Pay off any debt with APR > mortgage rate before buying. Frees up back-end ratio.
• Put 20% down to avoid PMI. The monthly PMI eats 0.3–1.5% of the loan annually — comes straight out of your housing-payment budget without buying you anything.
• If you're at the front-end limit, you're at the lender's cap, not yours. Drop 10% off the target and you'll thank yourself in two years.
• Don't max out the 36% back-end with discretionary debt. Cars, especially, eat into housing budget — a $700/mo car payment costs you $230k of home affordability over the life of a 30-year loan.