A mortgage is a long-term financial commitment. You’ll want to ascertain whether you can afford it before borrowing to buy a home. The 28/36 rule can be your guide, considering that mortgage lenders have used it to assess potential borrowers’ financial health for many years. The ratio takes into account your income and debts, helping evaluate your ability to repay your mortgage and avoid problems such as foreclosures. Here’s how the 28/36 ratio can help you plan for affordable housing.
What Is the 28/36 Rule?
The 28/36 rule is a measure of your ability to afford a home loan based on your gross income, housing-related cash outlays, and any other debt payments per month. The rule has two key components, the first of which suggests that you shouldn’t spend more than 28% of your gross income per month on housing-related payments. The second component states that you shouldn’t use more than 36% of your monthly income on all debt payments, including housing expenses.
Understanding the 28% Front-End Ratio
The first half of the rule is your total housing cost divided by your monthly income. Here, total housing costs are summarized as PITI include monthly mortgage payments (principal + interest), property taxes, and insurance. These also include any monthly fees paid to any housing association, such as HOA. However, utility bills are not part of these calculations.
Take the example of monthly housing costs totaling $1,300 and a monthly family income of $4,700. The front-end ratio is $1,300 divided by $4,700, which comes to 27.65%. In this case, the borrower satisfies the 28% front-end standard.
Satisfying the 36% Back-End Ratio
This rule is also called the debt-to-income ratio. To determine your back-end ratio, divide your total monthly debt by your monthly income, including your salary and any investment profits. Total monthly debt includes automobile loans, credit cards, student loans, and personal loans. Anything above 36% may prevent you from qualifying for a mortgage in the eyes of many lenders.
Consider a home buyer with total housing-related expenses of $1,300 per month. Add this amount to other loan payments, bringing all monthly debts to $1,700. Dividing total debt by a total family income of $4,700 brings the back-end ratio to 37.23%, which is a little over the 36% standard.
Taking Into Account Other Costs
To avoid running into financial turmoil after taking a mortgage to buy your first home, be sure to consider other expenses that may eat into your monthly income. The total cost of homeownership can increase quickly due to maintenance and repairs or home improvements costing thousands of dollars annually.
Fixing or maintaining plumbing and HVAC systems are some of the additional costs to think about over the long term. If your home maintenance costs are too high, then it brings the risk of defaulting on mortgage payments.
When you’re looking to buy a home, consider improving your financial health based on the 28/36 rule. Satisfying the ratio indicates that you can afford mortgage payments that come with owning a home. If you’re searching for an affordable home loan around California, contact Andraya Coulter today for professional assistance.