Use the 28/36 Rule to Decide If You Can Provide a Mortgage
Before taking on a mortgage, consider the 28/36 rule to make sure you don’t overdo it. How does the rule work? This is a smart way to measure your debt burden before applying, and most lenders already use it to approve loans, so you can check the numbers as well to see how you add up. This is how it works.
What is the 28/36 Rule?
You may have heard the phrase ” poor at home “? It describes a phenomenon in which a homeowner invests all of their funding and cash into home ownership – to the point where they cannot cover other costs, such as unexpected repairs or health care costs. Of course, this could put homeowners at risk of defaulting on their mortgage obligations. To avoid this, lenders prefer to use two specific debt-to-income ratios, known as the 28/36 Rule, which are distributed as follows:
- Your total property expenses must not exceed 28 percent of your gross monthly income. Known as the “upfront factor, ” it covers housing costs, including mortgages, property taxes, mortgage insurance, and homeowners’ association fees (although utilities are not included for some reason). To find out if your prepayment ratio is more than 28%, add up all your housing expenses (or potential housing expenses) and divide that amount by your gross monthly income. Then multiply that number by 100 to get the appearance factor.
- Your family’s total debt, including your property expenses, should not exceed 36 percent of your gross monthly income. This relationship, known as the “debt-to-income ratio,” or “ bottom line, ” encompasses credit cards, student loans, personal loans, car loans, child support, child support, and utility bills. To find out if your IRR is more than 36%, add up all of your monthly housing and consumer debt and divide that amount by your monthly gross income. Then multiply that number by 100 to get the original odds.
What if my debt exceeds the 28/36 threshold?
Not everything is lost. You can still qualify for loans if you have an excellent credit history and as the insider points out , government-backed loans, FHA, VA or USDA will approve ratios that are slightly higher.
However, keep in mind that applying for a mortgage will result in a heavy rejection of your loan , which could temporarily damage your credit rating. For this reason, you will want to check the numbers before applying for a mortgage, as this will give you an idea of whether you qualify without a tough credit check. If you are ineligible, financial experts recommend postponing buying a home until you have more income or a larger down payment.