The 28/36 rule refers to a common-sense approach used to calculate the amount of debt an individual or household should assume. A household should spend a maximum of 28% of its gross monthly income on total housing expenses according to this rule, and no more than 36% on total debt service. This includes housing and other debt such as car loans and credit cards.

The 28/36 rule is a guideline often used by lenders to determine how much mortgage you can afford based on your income and existing debt. Here's how it works and how you can apply it to your finances:

Understanding the Rule:

• The "28" refers to the percentage of your gross monthly income that should be allocated to housing expenses, including mortgage payments, property taxes, homeowner's insurance, and any homeowner association fees.
• The "36" represents the total debt-to-income ratio, including housing expenses plus other debt obligations such as car loans, student loans, credit card payments, etc.

Calculate Your Limits:

• Start by calculating 28% of your gross monthly income. This gives you the maximum amount you should spend on housing expenses.
• Then, calculate 36% of your gross monthly income. This is the maximum amount you should spend on total debt payments.
• These calculations will give you the upper limits for your housing expenses and total debt payments.

Assess Your Current Situation:

• List all your existing monthly debt obligations, including credit card payments, student loans, car loans, etc.
• Add up your monthly housing expenses or estimate them if you're planning to buy a house.

Compare with the Limits:

• Check if your housing expenses fall within 28% of your gross monthly income.
• Verify if your total debt payments, including housing expenses, fall within 36% of your gross monthly income.

Adjustments:

• If your expenses exceed these limits, consider adjustments. You might need to look for a less expensive home, pay off some debts to lower your total debt payments, or increase your income.

Consider Other Factors:

• While the 28/36 rule is a good guideline, it's not a one-size-fits-all solution. Consider other factors like your lifestyle, savings goals, and future financial plans.
• You might be comfortable with a lower debt-to-income ratio or prefer to allocate more towards savings and investments.

Regular Reviews:

• Your financial situation can change over time, so it's essential to review your budget regularly and adjust as needed, especially when major life events occur, such as getting a raise, changing jobs, or having a child.

Applying the 28/36 rule can help ensure that you're not overextending yourself financially and can comfortably manage your debt obligations while still enjoying your desired lifestyle.