![]() If you qualify for a government-backed mortgage through the FHA, VA, or USDA, a lender could approve your application with a higher ratio. You should also remember that the 28/36 rule mainly applies to conforming mortgages. You could also still be approved with higher debt ratios, but just pay a higher rate than you would if you had less debt. Maybe you have an excellent credit score or more than 20% for a down payment. There are some exceptions.Ī lender may still approve your application if other parts of your financial profile are exemplary. If you have too much debt to pass the 28/36 test, don't throw in the towel just yet. Your monthly debt payments come to $1,600 total.ĭivide $1,600 by your gross monthly income ($5,000) to get 0.32. Maybe you're paying $1,300 toward your house each month, $50 toward your credit cards, and $250 toward student loans. The back-end ratio refers to housing payments along with payments toward credit cards, student loans, car loans, personal loans, alimony, and child support. The back-end ratio is important because even if your housing payments come to less than 28% of your gross income, you might have other debts that make you a higher lending risk. According to the 28/36 rule, you'd ideally want your back-end ratio to be 36% or less. This is the ratio of your total monthly debt payments compared to your gross monthly income. It could also be called the "debt-to-income ratio." You also may hear the term "back-end ratio" in the mortgage lending process. Added together, you're paying $1,300 per month toward your home.ĭivide $1,300 by $5,000 for a total of 0.26. You pay $1,000 toward the principal and interest, $150 toward property taxes, $100 toward homeowners insurance, and $50 in HOA dues. Let's say your gross income is $5,000 per month. Keep in mind that utility bills are not part of your front-end ratio. Homeowner's association dues: If you live in a neighborhood with a homeowner's association, your monthly dues factor into your front-end ratio. ![]() Insurance: You'll pay for homeowners insurance, and you might have additional insurance policies to cover things like floods or earthquakes.You could end up paying hundreds each month. Property taxes: Your property taxes will depend on your home value and where you live in the US.Interest: The lender charges you interest for borrowing money, and you'll pay money toward interest every month as part of your mortgage payment. ![]() Principal: This is the amount you borrow for your mortgage.The front-end ratio doesn't just refer to your mortgage payments. You may hear your lender use the term "front-end ratio." This is the ratio of your monthly housing expenses versus your monthly gross income, and according to the 28/36 rule, the ratio should ideally be 28% or less. But if taking out a mortgage would make you take on more debt than you'd like, many lenders will still approve you for a mortgage. You'd probably be approved for the amount you want to borrow and receive a good interest rate. Keep in mind, passing the 28/36 rule makes you a competitive buyer. You might have trouble getting a conforming mortgage if either of the following is true: Taking out a mortgage would cause you to spend more than 28% of your gross income on housing expenses, or the amount would make you spend more than 36% of your gross income on total monthly debt payments. (Remember that gross monthly income refers to the income you earn before taxes are taken out.) You should also only spend 36% of your gross monthly income on all your debts, from credit cards to car loans to child support. ![]() The 28/36 rule refers to how much debt you can take on and still be approved for a conforming mortgage, which is what you may think of as a "normal mortgage" that isn't backed by the government.Īccording to the rule, you should only spend 28% or less of your gross monthly income on housing expenses. What is the 28/36 rule, and how does it affect your mortgage? ![]()
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