The 28/36 Rule: How Lenders Determine How Much You Can Afford

When you're buying a new home, your lender determines how much house you can actually afford, and they have some specific calculations to help them.

Why it matters: Understanding how lenders calculate your borrowing power can help you set realistic expectations before house hunting and help strengthen your position.

What is the 28/36 Rule?

The 28/36 rule suggests:

• Your monthly housing expenses (mortgage, property taxes, insurance) should not exceed 28 percent of your gross income

• Your total monthly debt payments should not exceed 36 percent of your gross income

"Lenders calculate debt-to-income (DTI) ratio as a front-end and back-end ratio,” said Ryan Sandell, Division President of Landsea Mortgage. “The front-end DTI refers to the percentage of your gross monthly income that goes towards housing expenses, such as principal, interest, property taxes, and insurance. The back-end DTI includes all of an applicant's monthly debt payments, including the proposed housing expense as a percentage of gross income."

Example:

• Gross monthly income: $7,000

• Maximum housing payment: $1,960

• Maximum total debt payments: $2,520

Is the 28/36 Rule Still Relevant?

While the 28/36 rule has been a longstanding guideline, its role is evolving with lenders.

"I think of this rule as more of a benchmark these days,” Sandell said. “Many lenders today are more flexible and will go beyond these numbers and use a more holistic approach and consider credit score, savings, down payment, and overall financial health."

Beyond the Rule: What Else Matters

Credit score: A higher score may help you qualify for better rates and higher borrowing power.

• Down payment size: More money down often means more borrowing flexibility.

• Employment history: Lenders typically look for at least two years of stable employment, either at the same job or within the same industry.

"Lenders will look at credit history, employment history, assets and savings and, of course, loan type and term," Sandell said.

Home Financing Strategies with Builders

Many builders partner with preferred lenders who offer incentives, such as:

• Interest rate buy-downs: Builders may pay to reduce your interest rate temporarily (for 1-2 years) or permanently.

• Closing cost assistance: Some builders cover thousands in closing costs when you use their preferred lender.

• Down payment assistance: While less common, some builders contribute to your down payment, especially in competitive markets.

Negotiating Free Upgrades Instead of Price Cuts

Builders rarely lower their base prices. Instead, try negotiating for free upgrades, which can add substantial value.

Smart upgrade targets include:

• Flooring: Switching from carpet to hardwood in main living areas.

• Kitchen: Granite or quartz countertops and upgraded appliances.

• Energy efficiency: Better insulation, high-efficiency HVAC systems, or smart home features .

First-Time Buyer Misconceptions

Many first-time homebuyers often assume the barriers are higher than they actually are.

"We are doing what we can to address the misconceptions that first-time homebuyers have by focusing on education,” Sandell said. “Every homebuyer and family has a unique financial situation that will need to be analyzed and worked through. More often than not, applicants are pleasantly surprised with the answers they receive after being educated on the process and their options."

Maximizing Your Affordability

Improve your debt-to-income ratio before applying for a mortgage by:

• Paying down credit cards and personal loans

• Avoiding new debt

• Considering paying off a car loan if it's nearly complete

• Keeping old credit accounts open if they're in good standing

• Timing it right - Mortgage rates change daily. Some builders lock your rate at contract signing, while others lock it closer to closing.

Lender Support and Programs

Some lenders offer specialized programs to help buyers qualify for more home.

"We offer a soft pull on the initial application to ensure applicants receive all of the information needed to make a decision without an inquiry on their credit. We strive to make it a very personal conversation, narrowing in on specific goals for each homebuyer," Sandell said.

Even with financial hurdles, there are often solutions available that many buyers don't know about.

"If credit scores need to be raised, we can do that with our Road 2 Home Program, a no-cost credit enhancement program offered to every Landsea Homes client,” Sandell said. “We have various loan programs available to help with any situation a potential buyer walks through the door with."

Understanding Your Limits—and Opportunities

The 28/36 rule gives you a framework, but there’s wiggle room. Builders and lenders understand affordability isn't black and white and will get creative to help you land the home you love.

Bottom line: Explore different financing options and builder incentives. The right combination can make a significant difference in what you can afford.