In Real Estate, the term 28/36 rule refers to the rule of thumb used to calculate the debt one should take on. This rule has two parts to it. The first part, 28 or front-end ratio, means one should spend no more than 28% of total gross monthly incomes on housing expenses or PITI (which includes Principal, Interest, Taxes and Insurance). The second part, 36 or back-end ratio, means one should spend no more than 36% of total gross monthly incomes on total debt obligations which include housing expenses and other debts such as credit cards, vehicle loans and personal loans… Lenders often use this rule as a quick way to assess whether a potential borrower could qualify for a loan. Potential home buyers could use this rule to quickly determine if they can afford the house or not.

**How is 28/36 rule calculated?**

To calculate the front-end ratio, divide total monthly housing expenses by total monthly gross incomes and multiply the result by 100. Likewise, to calculate the back-end ratio, divide total monthly housing needs and other debt obligations by total gross incomes and multiply the result by 100. That gives you the ratios needed to quickly determine if you can afford the house or not. The ratios are calculated with the following formula:

**ratio = (debt obligations / incomes) * 100**

Supposed an individual makes $4,000/month, with a PITI of $1,080 and total debt obligations of $1,420 then his front-end ratio would be **(1,080 / 4,000) * 100 = 27.0%** and his back-end ratio would be **(1420 / 4000) * 100 = 35.5%**.

With that, we can derive the maximum amount of debt obligations for each ratio using the following derived formula:

**max amount = (ratio / 100) * incomes**

To illustrate this point, let’s check out this example. Assuming the same individual makes $4000/month, his maximum front-end amount would be **(28 / 100) * 4000 = $1,120.00**. And with the same formula, we can calculate his back-end amount to be **(36 / 100) * 4000 = $1,472.22**. In this example, $1,120.00 and $1,472.22 are his maximum front-end and back-end amounts that he should assume. Staying under those numbers means he should be able to afford a house if the payments don’t exceed those numbers. He should be able to pay for housing expenses and total debt obligations each month with no financial stress.

**Conclusion**

Use the 26/38 rule as a general guideline to calculate housing needs. Lenders don’t just based on this rule to make their lending decision. Borrowers should not rely on these numbers alone to determine how much house they could afford. Everyone’s situation is different and so is their incomes and expenses. Staying under these numbers means most people would be comfortable with the debt obligations they have. Your situation might be different and so you might be able to afford higher numbers or it might require you to stay below these numbers. When in doubt, stay well below these numbers and give yourself some room for unexpected expenses.

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