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Planning to Buy a Home? The 28/36 Rule Explained
A guideline to help you determine how much house you can comfortably afford.

What is the 28/36 Rule?

The 28/36 rule is a common guideline used by lenders and financial planners to assess housing affordability. It suggests that:

  • The 28% Rule (Front-End Ratio): You should spend no more than 28% of your gross monthly income (GMI) on total housing expenses. This includes principal, interest, property taxes, and homeowner's insurance (often abbreviated as PITI). If applicable, it also includes Homeowners Association (HOA) fees.
  • The 36% Rule (Back-End Ratio or Debt-to-Income Ratio): Your total monthly debt payments (including the proposed PITI and other debts like car loans, student loans, credit card payments) should not exceed 36% of your gross monthly income.

Lenders use these ratios to determine how much they are willing to lend you, as it indicates your ability to manage monthly payments.

How to Calculate Your Affordability

Example Calculation:

Assume your Gross Monthly Income (GMI) is ₹1,00,000.

  • Maximum Housing Expense (28% Rule): ₹1,00,000 × 0.28 = ₹28,000 per month.
    (This is the target for your PITI + HOA fees)
  • Maximum Total Debt (36% Rule): ₹1,00,000 × 0.36 = ₹36,000 per month.
    (If you have ₹10,000 in other monthly debt payments, your PITI should not exceed ₹26,000 to stay within this rule).

Lenders will typically approve you for a loan where your PITI fits the lower of the two calculations (i.e., if other debts are high, the 36% rule might limit your housing expense more than the 28% rule).

Benefits of Adhering to the 28/36 Rule

  • Avoid Being "House-Poor": Ensures you have enough money left after housing expenses for other needs, wants, savings, and investments.
  • Manage EMI Stress: Keeps your mortgage payments at a comfortable level, reducing financial stress.
  • Better Loan Approval Chances: Meeting these ratios generally improves your chances of getting a home loan approved.
  • Room for Other Financial Goals: Allows you to continue saving for retirement, education, emergencies, etc.
  • Financial Stability: Provides a buffer against unexpected income drops or expense increases.

Limitations and Considerations

  • Guideline, Not a Strict Rule: Lenders may have slightly different criteria, and some may approve higher ratios for borrowers with strong credit profiles or large down payments.
  • Gross vs. Net Income: The rule uses gross income. Your actual take-home pay is lower, so be mindful of your net income when budgeting.
  • Cost of Living: In high cost-of-living areas, adhering strictly to 28% for housing might be challenging.
  • Personal Financial Situation: Your individual spending habits, savings goals, and risk tolerance play a significant role. Someone with no other debt might comfortably exceed the 28% for housing if they are frugal elsewhere.
  • Future Income Potential: If you expect significant income growth, you might be comfortable stretching slightly.
  • Down Payment Size: A larger down payment reduces your loan amount and EMI, making it easier to meet these ratios.