The 28/36 rule: how lenders decide what you can borrow

Borrowers obsess over credit scores. Underwriters obsess over debt-to-income. A high score gets you a good rate; an acceptable DTI is what gets you an approval at all, because it is the closest thing a lender has to a measure of whether the payment is survivable.

The traditional benchmark is the 28/36 rule. No more than 28% of gross monthly income going to housing — principal, interest, taxes, insurance and any association fee — and no more than 36% going to all debt payments combined. Modern programmes stretch the back-end figure to 43% routinely and to 50% with compensating factors, but 36% remains the line where borrowing stays comfortable rather than merely permitted.

Two details change the answer more than people expect. First, the calculation uses gross income, not take-home. On 7,500 gross with 5,600 net, a 2,720 debt load is a 36% DTI to a lender and a 49% squeeze in your actual bank account. Both numbers are true, and only one of them decides the loan.

Second, only minimum payments count. If you voluntarily pay 800 a month against a card whose minimum is 150, the underwriter records 150. This creates a real strategic point: paying a card down to zero and closing nothing removes almost no DTI, while clearing a small instalment loan removes its entire payment from the ratio.

That is the lever worth knowing. Retiring a 420 car payment on a 7,500 income cuts back-end DTI by 5.6 percentage points, which at typical rates translates into roughly 90,000 of extra mortgage capacity. No amount of credit-score optimisation moves the needle that far.

Before you apply, run your own DTI both ways, front and back. If the back-end figure is above 40%, spend the months before an application removing payments rather than balances — it is the same money, deployed where the underwriting formula can actually see it.