How your debt affects your home affordability

Before you dive into house hunting, getting good control of your budget is crucial — specifically, how much you can afford to pay each month on your mortgage payments.

There are several ways to measure this, but one of the most common strategies is called the “28/36 rule.” Here’s how the 28/36 rule can help you determine the price range for a home.

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Learn more: How much house can I afford? Use Yahoo Finance’s Home Affordability Calculator.

The 28/36 rule is a common guideline for determining what you can spend on a home. The rule states that you should spend no more than 28% of your gross monthly income on housing (your monthly mortgage payment) and a maximum of 36% on all your debts. This may include your mortgage payment, student loan payment, car payment, credit card minimum, and any other debts you pay off monthly.

Remember, the “housing payment” of the 28/36 rule refers to the costs that make up your monthly mortgage payment, such as principal, interest, property taxes, and homeowners insurance. It does not include other housing costs, such as incidental repairs.

Mortgage lenders also use the 28/36 rule to evaluate your ability to make monthly payments when applying for a mortgage loan. It’s just a rule of thumb, and many lenders allow borrowers to exceed these thresholds and still qualify for a loan.

Learn more: Best Mortgage Lenders for First Time Home Buyers

The 28/36 rule is easiest to understand through an example. Let’s say you and your spouse make $120,000 a year — or $10,000 a month in gross (before tax) income.

Under the 28/36 rule, you can customize the following:

• $2,800 per month in monthly mortgage payments ($0.28 x $10,000 = $2,800)

• $3,600 per month on your total debt payments ($0.36 x $10,000 = $3,600).

You can then use a mortgage calculator to determine your home buying budget. For example, with these thresholds and a mortgage rate of 6.75%, you can expect to buy a home worth about $450,000.

Dig deeper: What percentage of your income should go toward the mortgage?

The 28/36 rule is another way to break down your debt-to-income ratio, or DTI — a reflection of how much of your monthly income is consumed by your debt. To calculate your DTI, divide your total monthly debt (before tax) by your total monthly income, as in the example above.

DTI plays a major role in your ability to qualify for a loan, and mortgage lenders typically look at two factors: the front-end ratio and the back-end ratio.

Your DTI front-end ratio is the amount of income your mortgage payments account for. Your back-end ratio shows your total debt payments in relation to your income. (With the 28/36 rule, “28” is the DTI for the front end, while “36” is the rear end.)

Read more: How much money do I need to buy a house?

If you don’t see numbers you like when you break down your debt-to-income ratio or you’re concerned about qualifying for a loan based on the 28/36 rule, there are things you can do to help your case.

• Pay off your debts: The fewer debt payments you owe each month, the more cash you can spend to make your mortgage payments.

• Increase your income: Higher income means lower DTI and an easier chance to qualify for a mortgage. You can increase your income by asking for a raise, working extra hours, working a side gig, consulting or freelancing, or getting a second job.

• Delaying home purchase: Waiting to buy a home for a while can also help. This may give you more time to reduce your debt, get a promotion at work, or make other changes that can help you, such as boosting your credit score.

• Adjust your home search: If your current 28/36 numbers aren’t enough to allow for the purchase of a home in your ideal neighborhood, you may look for creative solutions — such as buying a condo or co-op, looking at more rural communities, or shopping for a smaller home.

• Bring a participating buyer: If you can bring in another buyer (and their monthly income), that could improve the numbers and swing things in your favor. Just make sure it’s someone you trust financially, especially if both names are on the loan documents.

Talking with a loan officer or financial advisor can also help. They can provide personalized guidance based on your specific home buying goals and finances.

Dig deeper: Is now a good time to buy a home?

The 28/36 rule states that you should spend no more than 28% of your gross monthly income on housing (your monthly mortgage payment) and no more than 36% on all of your debts.

Using the 28/36 rule, you can probably afford a monthly mortgage payment of $2,800 and total debt of $3,600, which includes your mortgage, car, student loans, credit card, and other debt payments.

The 28/36 rule is based on your gross income — that is, your income before you pay taxes. Under the 28/36 rule, you can typically purchase a home with a down payment that is 28% or less of your total monthly income and total monthly debt payments (including mortgage) that are 36% or less of your monthly income.

The 28/36 rule is another way to determine your debt-to-income ratio. The “28” refers to your front-end DTI, which is the amount of your monthly income that goes toward housing costs (ideally no more than 28% of your monthly income). The number “36” refers to the ideal background DTI — or the amount of your monthly income accounted for by your total debt, including your mortgage payment, car payment, student loan payment, and other debts. According to the 28/36 rule, no more than 36% of your monthly income should go toward all your debts.

This article was edited by Laura Grace Tarpley.