Budgeting for a Home: The 28/36 Rule and Better Ways

The 28/36 rule says your housing costs should be no more than 28% of your gross monthly income and all your debt payments, housing included, no more than 36%. It is a quick sanity check, not a law, and it ignores taxes, savings goals and the extra costs of owning in New York City, so use it as a starting point and then test the number against your take-home pay.

How the 28/36 rule works

Both numbers use gross income, meaning pay before taxes and deductions. The CFPB defines debt-to-income ratio (DTI) as all your monthly debt payments divided by your gross monthly income. The 28% figure is a housing-only ratio, often called the front-end ratio. The 36% figure is the total, or back-end, ratio.

Example: a household earning $150,000 a year has $12,500 a month gross, and pays $600 a month on a car loan.

• 28% front-end limit: $12,500 × 0.28 = $3,500 for housing.
• 36% back-end limit: $12,500 × 0.36 = $4,500 for all debt. Minus the $600 car loan leaves $3,900 for housing.
• The lower of the two wins, so the rule suggests a housing cost of about $3,500 a month.

"Housing cost" here means everything you pay to live there: principal, interest, property tax, homeowners insurance, mortgage insurance, and condo common charges or co-op maintenance. Leaving out maintenance or common charges is the most common way people flatter their own ratio.

How 28/36 compares with what lenders actually allow

Lenders usually allow more than 28/36. The CFPB notes that different loan products and lenders have different DTI limits. Here is what two of the biggest rulebooks say, using the same $12,500 monthly income and $600 car loan.

FHA's manual matrix also allows 37/47 or 40/50 when the borrower has compensating factors such as documented cash reserves. A lender's maximum tells you what you can borrow, not what you can comfortably pay. At 50% DTI, half your gross pay goes to debt before taxes, food, transit and savings.

NYC realities the rule misses

Co-op boards often set stricter limits than lenders

In a co-op, the board reviews your finances too, and each building sets its own debt-to-income and post-closing liquidity requirements. Many are stricter than any lender. A buyer who passes underwriting at 45% can still be turned down. See co-op financial requirements and test yourself with the co-op board approval calculator.

Maintenance and common charges are big

Co-op maintenance includes the building's property taxes and often its underlying mortgage, so it can be a large part of the monthly cost. Condo owners pay common charges and their own tax bill. Both belong in the front-end ratio. See co-op maintenance vs condo common charges.

City income tax

NYC residents pay city income tax on top of federal and state tax, so the same gross salary buys less here than in most places. That is why a take-home budget matters more in New York. Our take-home pay budget calculator estimates your net pay.

A better way: budget from take-home pay

Instead of starting from a percentage of gross income, start from what actually lands in your bank account and work down.

1. 1

   Find monthly take-home pay

   Use pay stubs, after taxes, retirement contributions and health insurance.
2. 2

   Subtract non-housing essentials

   Food, transit, utilities, phone, childcare, insurance, medical costs.
3. 3

   Subtract other debt payments

   Car, student loans, credit card minimums.
4. 4

   Subtract savings you will not give up

   Retirement, emergency fund, other goals.
5. 5

   Subtract a home upkeep reserve

   Repairs and replacements, separate from the mortgage. Houses usually need more than apartments.
6. 6

   What is left is your all-in housing ceiling

   Mortgage, taxes, insurance and maintenance or common charges must fit under it.

In this example the take-home method lands a little under the 28% rule ($3,425 vs $3,500). Your own numbers may move it much further in either direction, which is the point: the budget reflects your life, not an average household.

Stress-test the payment before you commit

A payment that fits today has to keep fitting. Run it through the three things most likely to raise it.

1. A rate reset on an adjustable-rate mortgage

Take a $500,000, 30-year loan at 6.5%. The principal and interest payment is about $3,160. If it is a 5-year ARM, the balance after five years is about $468,055. If the rate then resets:

Your loan's caps limit how far it can move at each reset. Compare options with the ARM vs fixed calculator and read fixed vs adjustable-rate mortgages.

2. Taxes and insurance going up

If you escrow, rising tax and insurance bills raise your payment once a year, and a shortage can be added on top for 12 months. See how escrow shortages work.

3. Special assessments and maintenance increases

Co-ops and condos can raise maintenance or common charges and levy special assessments for big repairs such as facade work, roofs or energy upgrades. Read the building's financial statements and board minutes before you buy. See special assessments and co-op due diligence.

Which rule should you use?

Use all three. The lender maximum is the ceiling you cannot go above. The 28/36 rule is a quick reality check. The take-home budget is the number you should actually shop with.

Run your numbers

• Home affordability calculator: price range from income and debts.
• Debt-to-income calculator: front-end and back-end ratios.
• Home maintenance budget calculator: size the upkeep line.
• The true monthly cost of owning in NYC.