Have you ever used the 28/36 rule calculator? If you want to check and improve your financial health, then this tool is right for you! The 28/36 rule calculator is intended to help individuals and households determine whether an amount of debt is safe or not.
Many people also use it to find out how much home they can afford. Whether you plan on purchasing a home soon or you’ve already got a mortgage, this calculator can help you a lot. How does it work? There are two elements of the 28/36 rule:
- Back-end ratio, and
- Front-end ratio
You need to take into account housing costs as well as other debts when calculating them. But actually, you don’t have to calculate anything by yourself. Leave it to the calculator to do all the heavy lifting. Still, you should know the basic principle of the 28/36 rule, which is why we recommend that you go through this article.
What’s the 28/36 Mortgage Rule?
The 28/36 rule is a rule of thumb that many mortgage lenders use to determine whether or not a borrower will qualify for a loan. The rule says that the borrower’s monthly housing costs, including their proposed mortgage payment, must not exceed 28% of their gross monthly income and the loan amount cannot exceed 36% of the borrower’s gross annual income.
In other words, the rule states that an applicant’s total monthly debt payments (including their proposed new home or car loan) should be no more than 36% of their gross income. In addition, their total monthly housing expenses (including principal, interest, insurance, and property taxes) should be no more than 28% of their gross income.
So, the 28/36 rule is a guideline that mortgage lenders or banks use to determine if you are able to afford your monthly mortgage payment. When applying for a mortgage, your max household expenses will be referred to as PITI:
- Principal – This part will go toward your down payment after getting a mortgage.
- Interest – That’s the rate that banks charge when they lend money.
- Taxes – When talking about taxes, we think of the property tax in this case.
- Insurance – This is actually homeowners insurance.
28/36 Rule & Types of Mortgage
As you already know, a mortgage is a loan that is secured by a lien on a home or other property. The borrower receives the title to the property as security for repayment of the loan. In most countries, mortgages are only available in local currency. Mortgages are typically long-term loans, with 30-year fixed-rate being most common in the United States and Canada, while 25-year fixed-rate is more common in Europe and Japan.
With that said, it is important to note that each home loan is different. Some loans don’t have insurance and/or taxes included. When using our calculator, you can either break down your housing costs into their parts or type in just one value. This will depend on your needs. How do banks calculate this?
They look at both monthly gross income and monthly household expenses. That’s how they get the front-end ratio. Just like the back-end ratio, it tells whether households have enough money for their needs and function in a safe manner. If they tie a substantial portion of their income to get rid of debts faster, this often results in an unhealthy and unstable situation. Don’t do this!
28/36 Rule Formula
Now that you know more about the 28/36 rule, it is time to see what the formula looks like. In fact, you will learn how to calculate total debt as well as front-end and back-end ratios. This will help you get a better understanding of our calculator. Also, it will help you get an idea of how much house or mortgage you can afford. To get the result, you’ll have to provide the following values:
- Your monthly income
- Maximum household expenses (your housing costs), and
- Other debts – monthly debt payments like credit card bills and car loans.
To calculate the elements of the 28/36 rule, use the following formulas:
Front-end ratio = (Housing Costs / Income) * 100%
Back-end ratio = (Total Debts / Income) * 100%, where Total debt = Housing Costs + Other Debts
Example
Let’s say you have a monthly income of $5,000, while your housing costs are $1,000 after getting a mortgage. And let’s assume that you also have an auto loan (this is regarded as “Other debts”) of $500.
- Monthly income: $5,000
- Housing costs: $1,000
- Other debts: $500
When it comes to the 28/36 rule, the front-end ratio is the first thing that should be calculated.
Front-end ratio = ($1,000 / $5,000) * 100% = 20%
It’s far below 28%, meaning you’re in excellent standing. Okay, the next thing to calculate is the back-end ratio. But first, you should know your total debt.
Total debt = $1,000 + $500 = $1,500
Back-end ratio = ($1,500 / $5,000) * 100% = 30%
It’s below 36%. Good job! This means you will be able to borrow slightly more and your financial situation will not be endangered either.
Our calculator will save you the hassle of calculating these values by hand. Enter your figures and get the results in no time!
FAQ
How Much Home Can You Afford?
Once the banks know the back-end and front-end ratios, they can easily decide on how much money to lend. Their decision will depend on whether these values follow the 28/36 mortgage rule or not. However, this is not the only thing that comes into play.
There are many factors that determine the amount you can afford. The most important factor is your income and how much money you have saved up for a down payment on a home.
The next factor is your credit score. If it is low, then it will be difficult to get a mortgage or even qualify for one. The third factor that determines the amount of house you can buy is your debt-to-income ratio and other debts you may have such as student loans or auto loans.