February 20th, 2018 6:58 AM by Jackie A. Graves, President
The 28/36 Rule is the
rule-of-thumb for calculating the amount of debt that can be taken on by an
individual or household. The 28/36 Rule states that a household should spend a
maximum of 28% of its gross monthly income on total housing expenses and no
more than 36% on total debt service, including housing and other debt such as
car loans. This rule is used by mortgage lenders and other creditors to
assess borrowing capacity, the premise being that debt loads in excess of the
28/36 parameters would be difficult for an individual or household to service
and may eventually lead to default.
The 28/36 Rule is important for
individuals to be aware of when applying for all types of credit. The 28/36
Rule is a standard that is used by most lenders in addition to a borrower’s
credit score. All of the data used to arrive at a credit decision is pulled by
the underwriter from
a borrower’s credit record on file with a partnering credit data agency.
An individual’s credit score is often a
primary factor involved with the approval of a credit application. Lenders will
require that a credit score fall within a certain range. However, the credit
score is not the only consideration for approval. Lenders also consider a
borrower’s income and debt to income ratios. The 28/36 Rule is
a guide that lenders use to structure their underwriting requirements. Some
lenders may vary these parameters based on a borrower’s credit score,
potentially allowing high credit score borrowers to have slightly higher debt
to income ratios.
Lenders using the 28/36 Rule in
their credit assessment may include questions about housing expenses and
comprehensive debt accounts in their credit application.
Each lender establishes their own parameters for housing debt and total debt as
a part of their underwriting program.
Most traditional lenders will
require a maximum household expense to income ratio of 28% and a maximum total
debt to income ratio of 36% for loan approval. This means that household
expense payments, primarily rent or mortgage payments, can be no more than 28% of
monthly or annual income. Similarly total debt payments cannot exceed 36% of
income. Many underwriters vary their parameters around the 28/36 Rule with some
underwriters requiring a lower percentage and some requiring a higher
Some consumers may use the 28/36
Rule as a consideration when planning their monthly budget. While they may not
currently be seeking additional credit, these parameters can help to improve
their chances of credit approval. For example, an individual with a monthly
income of $5,000 who seeks to adhere to the 28/36 Rule could budget $1,000 for
a monthly mortgage payment and housing expenses. This would leave them with an
additional $800 for making other types of loan repayments.
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