The 28-36 Rule
Your willingness to pay a loan (typically determined by your credit score)Your ability to pay the loan back.
In order for your o answer these questions, you need to take into consideration several factors, like salary, debts, credit score, and the actual costs of buying a home. Something to help put all these numbers into perspective is the 28-36 rule.
How Does the 28-36 Rule work?
Your maximum Household Expenses (PIT) should not exceed 28% of your gross monthly income. (before taking out taxes and deductions). For example, if you make $70,000 a year and divide it by 12 months, your monthly gross income is $5,833. Multiply that by 28% and your monthly PITI should be less than $1,633.
PRINCIPLE: The part of a mortgage payment that pays down the amount borrowed.
INTEREST: Percent rate charged by creditors for lending you the principle
TAXES: This is your property tax
INSURANCE: This is your homeowner’s insurance(and if necessary, your private mortgage insurance, or PMI)
Debt – to – income Ratio DTI
Your total debt or Debt-to-Income Ratio(DTI) should not exceed 36 percent of your gross monthly income. Your debt determines, in part, how much of a mortgage loan you can afford. Lenders calculate your debt-to-income by dividing your monthly debt by your monthly income.
This is a general guideline lenders consider. It’s not a requirement to receive a mortgage. Banks and lenders typically consider debt made up of the following.
Car loans. Education/Student loans, Home equity loans(ex: second mortgage), Outstanding credit card balance.