To avoid spreading their financial resources too thin, homebuyers can adopt the 28/36 rule of thumb, a mortgage benchmark based on debt-to-income (DTI) ratios. Mortgage lenders use this rule to decide whether to approve your mortgage application.
The 28/36 rule of thumb’s operation, what it includes and excludes, some sample computations, and some cautions regarding its application are described below.
What Does the Mortgage 28/36 Rule Mean?
Mortgage lenders frequently use your debt-to-income ratio (DTI) as a benchmark to determine how much money they will allow you to borrow. The 28/36 rule is a well-known adage about DTI.
The 28/36 rule states that a household with a mortgage should not spend more than 28% of its gross monthly income on housing expenses and no more than 36% on monthly debt payments, including housing.
Understanding housing expenses is essential since they entail more than simply the sum of your monthly mortgage payment. Your housing expenditures may include condo fees, homeowner’s insurance, mortgage principal and interest, and other costs.
Read on to learn about 28/36 and where you can find Michigan home loans.
The 28/36: How Does It Work?
The 28/36 rule of thumb, therefore, aids mortgage lenders in determining how much to loan you.
Consider that your gross monthly salary is $6,000 before any taxes or other deductions from your pay.
In general, your monthly debt payments, including your mortgage, shouldn’t be more than $2,160 ($6,000 x 36%), and your monthly mortgage payment shouldn’t be more than $1,680 ($6,000 x 28%).
A mortgage lender may use this guideline to gauge or estimate that you’ll be able to take on a certain monthly mortgage payment for the foreseeable future. What size home can you afford to purchase? It is determined by applying the 28/36 rule.
Note: Knowing the basic rule of thumb may help determine how much of a property you can reasonably afford before looking for one.
Your Debt-to-Income Ratio Calculator
Calculating your debt-to-income ratio is easy with a Michigan mortgage calculator. Your monthly gross income, which is your income before taxes and any deductions, must first be calculated. You should add up your two incomes if you and your spouse want to apply for the mortgage together and you’re married.
Your total monthly debt payments, which should not exceed $2,520, should include your $1,960 mortgage and any taxes and insurance payments.
Sadly, the law mandates that you maintain your monthly payments within specific boundaries. The next step is to assess how your previous loans may affect you. Add up all your monthly installments for credit cards, auto loans, and non-mortgage bills.
Why the 28/36 Rule of Thumb Usually Works
The 28/36 rule is important in risk assessment as a mortgage lender. Ratios greater than 28/36, even up to 50% on the back end, may be approved for a mortgage. To get approved with greater ratios, you’ll need a strong credit score and possibly a sizable down payment as the risk increases.
What factors does the DTI ratio specifically consider when determining your monthly debt obligations? Any of the payments below may be taken into account by your DTI:
- The next home loan payment
- Credit cards
- Student loan debt
- Automobile loans
- Personal loans
- Alimony and child support payments
- Loans you co-signed for
Note: Payments for utilities, cable, cell phones, and insurance are not accounted for in your DTI.
The 28/36 rule is a guideline that suggests that borrowers should not spend more than 28% of their gross income on housing expenses and should not spend more than 36% of their gross income on all debts, including their home loan in Michigan, car loans, student loans, etc.
Moreover, the 28/36 rule is a useful general guideline when determining how much you can afford to pay on a mortgage, while it is not set in stone. Remember that the 28/36 rule is only a suggestion; depending on your particular financial position, you could be able to pay more or less.
Contact Your Mortgage Consultant in Rochester Today!
Ascend Mortgage is a full service mortgage broker with offices in Rochester Hills, Michigan, and Jacksonville, Florida. To obtain the best interest rates and conditions on house loans, we work with borrowers in all 50 states. Visit us at 415 S Main St, Suite B