When you’re thinking about buying a home, a common question comes up, “How much should I spend on a home?”. The 28/36 rule can be your guidelines for a solid housing budget. Let’s dive into what it is and how it can help guide you on how much you should spend on a home,
The 28/36 rule is a guideline used by lenders to assess a borrower’s financial capacity for homeownership. It consists of two key ratios: the Housing Expense Ratio and the Debt-to-Income Ratio.
The Housing Expense Ratio suggests that your monthly housing expenses, including mortgage payments, property taxes, and homeowner’s insurance, should not exceed 28% of your gross monthly income. This ratio primarily focuses on your ability to afford the essential costs associated with owning a home.
To calculate your Housing Expense Ratio, simply divide your monthly housing expenses by your gross monthly income. Then multiply by 100.
For example, if your monthly housing expenses are $2,500, and your gross monthly income is $9,000, the calculation would be:
Housing Expense Ratio = (2,500 / 9,000) x 100 ≈ 27.78%
The Debt-to-Income (DTI) Ratio takes a broader view of your financial obligations, considering all your debt payments, including housing expenses, credit card debt, car loans, student loans, and any other obligations. According to the 28/36 rule, your total debt payments should not exceed 36% of your gross monthly income.
To calculate your Debt-to-Income Ratio, sum up your monthly debt payments and divide them by your gross monthly income. Then multiply by 100.
For example, if your total monthly debt payments (including housing expenses) amount to $3,240, and your gross monthly income is $9,000, the calculation would be:
Debt-to-Income Ratio = (3,240 / 9,000) x 100 ≈ 36%
Adhering to the 28/36 rule can provide valuable insights into how much you can comfortably spend on buying a home. It helps ensure that you don’t overextend yourself financially and leave room for other important financial goals and lifestyle choices.
While the 28/36 rule serves as a useful guideline, it’s essential to keep your individual circumstances in mind. Factors such as job stability, potential changes in income, and future financial aspirations should influence your decision-making process. Remember that owning a home comes with additional expenses beyond the mortgage, such as maintenance, utilities, and unexpected repairs. Be mindful of these costs and set aside funds to help with these.
The 28/36 rule serves as a valuable tool in determining how much you should spend on buying a home, striking a balance between your housing expenses and total debt obligations. Embracing this guideline ensures that you make a financially responsible decision. It can pave the way for a rewarding and sustainable homeownership journey.
If you’ve got questions about how to figure out what your monthly budget for your home should be, reach out to me! I’m happy to help.
August 2, 2023