The 28/36 Rule Explained
The 28/36 rule is the gold standard for determining home affordability. It's used by lenders nationwide and helps ensure you can comfortably afford your mortgage while managing other financial obligations.
28% Rule
Your monthly housing payment (mortgage principal + interest + property taxes + homeowners insurance + HOA fees) should not exceed 28% of your gross monthly income.
Example:
$100,000 annual income = $8,333/mo
28% of $8,333 = $2,333/mo max
36% Rule
Your total debt payments (housing + car loans + credit cards + student loans + personal loans) should not exceed 36% of your gross monthly income.
Example:
$100,000 annual income = $8,333/mo
36% of $8,333 = $3,000/mo max
Calculate Your Maximum Home Price
Follow these steps to determine how much house you can afford:
Calculate Monthly Housing Budget (28% Rule)
Multiply gross monthly income by 0.28
Your income: $120,000/year
$120,000 ÷ 12 = $10,000/mo gross income
$10,000 × 0.28 = $2,800/mo housing budget
Subtract Property Taxes & Insurance
Bergen County: ~2.1% annual property tax, 0.5% insurance
Estimated home price: $500,000
Property tax: $500,000 × 2.1% ÷ 12 = $875/mo
Insurance: $500,000 × 0.5% ÷ 12 = $208/mo
Available for mortgage: $2,800 - $875 - $208 = $1,717/mo
Calculate Affordable Loan Amount
Use current mortgage rate (6.25%) to find loan amount
$1,717/mo ÷ $6.15 (cost per $1K at 6.25%) = $279,186 loan
Add 20% down: $279,186 ÷ 0.80 = $348,983 max home price
Note: With $120K income and 28% rule, you can afford ~$350K home. This ensures comfortable payments within your budget.
Income Requirements for Bergen County Homes
See the income needed for typical Bergen County home prices (assumes 20% down, 6.25% rate, 2.1% property tax):
$400,000 Home
$80,000 down, $320,000 loan
Monthly Payment
$2,669
Required Income: $114,500/year (28% rule)
$600,000 Home
$120,000 down, $480,000 loan
Monthly Payment
$4,004
Required Income: $171,600/year (28% rule)
$800,000 Home
$160,000 down, $640,000 loan
Monthly Payment
$5,338
Required Income: $228,800/year (28% rule)
Debt-to-Income (DTI) Ratio
Lenders use DTI to determine loan approval. It's the percentage of your gross monthly income that goes toward debt payments.
DTI Calculation
DTI = (Total Monthly Debt Payments ÷ Gross Monthly Income) × 100
Example:
Gross monthly income: $10,000
Future mortgage payment: $2,500
Car loan: $450
Student loans: $300
Credit cards (minimum): $150
Total debt: $2,500 + $450 + $300 + $150 = $3,400
DTI: $3,400 ÷ $10,000 = 34% (Excellent)
Excellent
≤36%
Best rates
Good
37-43%
Standard approval
Fair
44-50%
FHA/VA may approve
Poor
>50%
Likely denied
How to Afford More House
1. Increase Down Payment
Going from 10% to 20% down eliminates PMI ($200-400/mo savings) and lowers loan amount, reducing monthly payment and expanding affordability.
Example: $600K home with 10% down = $5,400/mo payment. With 20% down = $4,800/mo payment.
2. Pay Off Existing Debt
Eliminating $500/mo in car/credit card payments lowers DTI by 5% and frees up $500 for housing, increasing affordability by $70-80K.
Strategy: Delay home purchase 6-12 months to aggressively pay down debt.
3. Improve Credit Score
Raising score from 680 to 740 can lower rate 0.25-0.50%, saving $50-100/mo and increasing buying power by $10-20K.
Quick wins: Pay credit cards below 30% utilization, dispute errors, avoid new credit.
4. Consider FHA/VA Loans
FHA allows up to 50% DTI, VA loans offer 0% down for veterans. These programs help buyers with higher debt or limited savings.
Note: FHA requires MIP, but still enables homeownership sooner.
Beyond the Numbers: Other Factors
While 28/36 rule provides structure, consider these factors for true affordability:
- Job Stability: Dual incomes reduce risk. Commission/bonus income may not fully count toward qualification.
- Emergency Fund: Maintain 3-6 months expenses after down payment and closing costs. Don't drain savings.
- Home Maintenance: Budget 1-2% of home value annually ($6-12K on $600K home) for repairs and maintenance.
- Lifestyle Goals: Max qualification may limit other goals (travel, dining, hobbies). Buy less if you want financial flexibility.
- Future Changes: Kids, education costs, potential job changes—don't stretch budget if major life changes expected.