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Did you know that monthly car payments and credit card debt can lower the amount a bank will lend you for a home? Many lenders use a guideline known as the 28/36 rule. The concept is that you should ideally spend no more than 28% of your income on housing and no more than 36% on your total combined debt So let's take Jack & Diane for example. Their combined monthly income is $5,949. That’s $71,389 per year (the 2024 Ohio median household income). They each have a car payment. One is $217 and the other is $342. They also have a camper financed at $236 per month, and Jack bought a motorcycle on a credit card with monthly payments of $134. Jack & Diane's debt obligations total $930 per month. That's over 15% of their monthly income. Let's explore how this can be an issue for their home buying aspirations. A lender might look at their financials and see that too much of their monthly income is already “spoken for.” Essentially, that 15% figure cuts into the 28% they might otherwise be able to use for housing. Here's an exercise to make this tangible: 36% of $5,949 is $2,142 Subtracting their $930 in existing debt leaves them with $1,212 for housing (Principal, Interest, Taxes, and Insurance). After estimating $250 for taxes/insurance and $60 for Private Mortgage Insurance (PMI), they are left with $902 for principal and interest. At a 6% interest rate, this supports a 30-year mortgage of $150,500. While enough for a modest first home in the heartland, they likely hoped for more. So what can they do to improve the situation? Well, they sit down at the kitchen table one night and talk about how they can lower their monthly debt. They realize the vehicle costing them $217 per month is only a year away from being paid off, so they tighten up their budget and pay it off as soon as possible. They also decide they don't use the camper often enough to justify the cost and sell it. Now, with only two remaining payments, their monthly debt drops to $476—exactly 8% of their monthly income. This allows them to use the full 28% of their income toward housing: $1,665. Let’s run the exercise again with their new budget. With a more expensive home, taxes and insurance will be higher (estimated at $350), and PMI might rise to $85. This still leaves $1,230 for principal and interest. Using the same 6% interest rate, they can now support a mortgage of $205,300. By simply paying off one vehicle and selling a neglected camper, Jack & Diane increased their buying power by $54,800—and Jack even gets to keep his motorcycle! The point of this hypothetical is so you understand how lenders consider your existing debt when coming up with a pre-approval figure. While commonly called a “rule,” 28/36 is really just a guideline lenders use to ensure you don’t overextend yourself. It helps them meet the legal requirement to evaluate a borrower’s ability to repay, but it isn't set in stone. Many lenders allow a total debt-to-income (DTI) ratio of up to 45% on conventional loans. And FHA, VA, or USDA programs often allow wiggle room as well. The 28/36 rule also doesn’t account for your credit score. If your credit is excellent, a lender may offer more leeway through what is known as a “compensating factor.” This reliability can help you qualify for a larger loan even if your debt will be higher than the ideal 36%. Ultimately, these numbers serve as a diagnostic tool. While each lender’s parameters differ, these guidelines act as a helpful warning system. If you aren't even close to aligning with them, you should seriously consider ways to lower your monthly debt. Call or text me with any questions, thanks! 419-775-6019