● Money & small business
What's a good debt-to-income ratio? Your housing budget by income at 28/36, 43% and 50%
Lenders judge how much housing you can carry with two ratios. The front-end ratio is your housing payment divided by your gross (before-tax) monthly income. The back-end ratio adds the minimum payments on your other debts: car loans, student loans, credit cards, personal loans. The classic rule of thumb is 28/36: housing up to 28% of gross income, housing plus debts up to 36%. Many lenders accept more on the back-end ratio, often up to 43% to 50% depending on the loan, your credit and your savings. All figures below use the same rule as our home affordability spreadsheet and the free debt-to-income ratio calculator.
A worked example
$85,000 a year is $7,083.33 a month before tax. Rent is $2,100, and the other debts are a $380 car payment, $240 of student loans and a $60 credit card minimum: $680 a month.
| Front-end ratio: $2,100 ÷ $7,083.33 | 29.6% |
| Back-end ratio: ($2,100 + $680) ÷ $7,083.33 | 39.2% |
| Housing allowed by the 28% limit | $1,983.33 |
| Housing allowed by the 36% limit after $680 of debts | $1,870.00 |
| Housing budget under 28/36 (the lower) | $1,870.00 |
This household is above 28/36 on both ratios. Staying at the same housing cost would take $230 a month less in debt payments to get the back-end ratio to 36%. Paying off the car loan and the card ($440 a month) would do it, since paying down an installment loan doesn't lower its payment until it's gone. A lender with a 43% cap would accept it as it is.
Most you could spend on housing, by income
Housing = rent, or the mortgage payment plus property tax, insurance, HOA and PMI. The 28/36 column is the lower of 28% of income and 36% minus debts; the 43% and 50% columns are the back-end limit alone.
| Income per year | Other debts per month | 28/36 | 43% back-end | 50% back-end |
|---|---|---|---|---|
| $50,000 ($4,167/mo) | $0 | $1,167 | $1,792 | $2,083 |
| $500 | $1,000 | $1,292 | $1,583 | |
| $1,000 | $500 | $792 | $1,083 | |
| $75,000 ($6,250/mo) | $0 | $1,750 | $2,688 | $3,125 |
| $500 | $1,750 | $2,188 | $2,625 | |
| $1,000 | $1,250 | $1,688 | $2,125 | |
| $100,000 ($8,333/mo) | $0 | $2,333 | $3,583 | $4,167 |
| $500 | $2,333 | $3,083 | $3,667 | |
| $1,000 | $2,000 | $2,583 | $3,167 | |
| $125,000 ($10,417/mo) | $0 | $2,917 | $4,479 | $5,208 |
| $500 | $2,917 | $3,979 | $4,708 | |
| $1,000 | $2,750 | $3,479 | $4,208 | |
| $150,000 ($12,500/mo) | $0 | $3,500 | $5,375 | $6,250 |
| $500 | $3,500 | $4,875 | $5,750 | |
| $1,000 | $3,500 | $4,375 | $5,250 | |
| $200,000 ($16,667/mo) | $0 | $4,667 | $7,167 | $8,333 |
| $500 | $4,667 | $6,667 | $7,833 | |
| $1,000 | $4,667 | $6,167 | $7,333 |
Under 28/36, up to 8% of income in other debts doesn't lower the housing budget at all: the 28% front-end limit binds first. Beyond that, every dollar of debt payment is a dollar less for housing. At $75,000, the first $500 of debts costs nothing; the next $500 costs $500 a month of housing.
What counts and what doesn't
Lenders use the minimum required payments on debts that show on your credit report, plus things like child support. Utilities, phone, insurance other than the home's, groceries and childcare don't count, which is why a ratio a lender accepts can still be tight for your own budget. Income is gross, before tax and before retirement contributions.
The home affordability spreadsheet turns the housing budget into a maximum home price with your down payment, rate, property tax, insurance and PMI, and compares up to five homes.