The 28/36 Rule of Affordability
Lenders typically use the 28/36 rule to determine how much they are willing to lend you. This rule focuses on your Debt-to-Income (DTI) ratio.
Front-End Ratio (28%)
This represents the percentage of your gross monthly income that should go toward housing costs. These costs, often abbreviated as PITI, include:
- Principal and Interest
- Property Taxes
- Homeowners Insurance
- HOA or Co-op Fees
Back-End Ratio (36%)
This represents the percentage of your gross monthly income that should go toward all debt payments combined. This includes your prospective housing costs plus:
- Car Loans
- Student Loans
- Credit Card Minimums
- Personal Loans
Other Factors to Consider
While DTI ratios are a great starting point, they don't tell the whole story. You should also consider:
- Your Lifestyle: Do you have expensive hobbies, travel often, or have high childcare costs? Lenders don't see these in your DTI.
- Emergency Fund: Ensure you have enough cash left over after your down payment to handle unexpected repairs or job loss.
- Future Plans: Are you planning to start a family or change careers soon? A smaller mortgage offers more flexibility.