Qualification Ratio – 28 / 36 Rule

The “28/36 rule” is a guideline used by many lenders in the United States to determine the maximum debt-to-income ratios that a borrower can have when applying for a mortgage loan. These ratios are used to assess a borrower’s ability to manage their monthly mortgage payments in relation to their overall financial situation.

Here’s an example to illustrate the 28/36 rule:

Let’s say your gross monthly income is $5,000.

1. Front-End Ratio: 28% of $5,000 = $1,400. This means your monthly housing expenses, including your mortgage payment, property taxes, homeowner’s insurance, and PMI (if applicable), should not exceed $1,400.
2. Back-End Ratio: 36% of $5,000 = $1,800. This means your total monthly debt payments, including housing expenses and other debts like car loans and credit card payments, should not exceed $1,800.

EXPLANATION

The first number, “28,” represents the front-end debt-to-income ratio. This ratio considers the percentage of your gross monthly income that can be allocated to housing expenses, including your mortgage payment, property taxes, homeowner’s insurance, and sometimes private mortgage insurance (PMI) if required. So, your housing expenses should not exceed 28% of your gross monthly income.

The second number, “36,” represents the back-end debt-to-income ratio. This ratio takes into account your total debt obligations, including your housing expenses and other monthly debts such as car loans, student loans, credit card payments, and any other recurring debts. Your total debt payments should not exceed 36% of your gross monthly income.

If your proposed mortgage and other debts fall within these guidelines, you may be considered a more qualified borrower in the eyes of many lenders. Keep in mind that different lenders may have slightly different criteria, and some may be willing to make exceptions or use different ratios, so it’s essential to consult with your lender to understand their specific requirements and terms when applying for a mortgage. Additionally, the 28/36 rule is just one aspect of the mortgage approval process, and other factors like credit score, employment history, and down payment amount also play a significant role in the lender’s decision.