Formula and Execution

28/36 rule

This rule states that housing cost should be 28% or less of your gross income; while total debt should not surpass 36% of your income.

Front end ratio

The ratio between housing cost and income is called the front end ratio.

Income

The total earning of the individual is called income.

Housing cost

The loan taken to finance the house is housing cost.

Housing cost

The loan taken to finance the house is housing cost.

Back end ratio

The total debt to income ratio is called the back end ratio.

Other debts

The debts other than housing debt are other debts.

Total debt

A combination of other debts and housing debt is total debt.

Principal loan amount

The amount borrower owed to the lender not included interest amount.

Loan interest

Amount paid on principal loan amount is loan interest.

Property tax

The tax imposed on the property is property tax.

Insurance

The amount charged as a result of protecting property against theft and other damages.

28/36 Rule Calculator [Home Affordability Calculator]

Due to lack of education and awareness about family planning, the world population is growing rapidly, and there are no signs that it will slow down soon. The families and individuals call for accommodations where they can live with peace and comfort. Therefore, these factors have resulted in the need for more housing lodges.

This is the reason why housing business is experiencing a sudden boom. But everything comes with consequences, and that’s why it’s quite difficult for the governments to provide people with adequate employment opportunities. People are too busy balancing their necessary household expenses like kitchen expenses, utility expenses, etc that it becomes a dream for them to own a new house.

So the question arises, is there any way to accomplish this dream of having our own house. Yes, with the help of our innovative tools, it becomes a breeze to solve your problems regarding housing costs, and other essential expenses. One such tool is home affordability calculator using 28/36 Rule.

28/36 Rule Calculator for Home affordability gives you insight about your income that how much percent of your earning can be expense out to housing cost. This calculator is beneficial in finding out how much I will pay in housing costs and how to plan the necessary expenses of the home in the remaining amount. This calculator can be used by everyone, but comes handy for people who are very tight at their budget and want to plan all their household expenses from the start of the month.

If you are interested in the functioning of the 28/36 home affordability calculator then stay with us, we will bring you more detail about the working of a home affordability calculator.

 

How to Calculate Home Affordability using 28/36 Rule

Before turning towards calculation, you must keep in mind that the 28/36 rule should be followed strictly. Otherwise, banks or other financial institutions will not lend you a loan for house financing.

Home affordability calculator operates in two modes (1) simple mode (2) advance mode

 

Simple mode

Simple mode has two central portions (1) Front end ratio (2) back end ratio, as shown below

The front end ratio: has two main parts, income and housing cost. Putting values in the income and housing cost portions is compulsory; otherwise, the front end ratio and total debt will show no results. So by putting any amounts of income and housing cost in their respective portions, it gives you a front end ratio.

The back end ratio: also has two portions, other debts, and total debt. Putting value in the other debts portion is optional; if you owed other debts, then put the amount, and if there are no other debts, then put zero to get the value of the back end ratio. Total debt is the combination of the "housing cost and other debts." The following picture shows the values of front end and back end ratios.

 

Advanced mode

Advance mode have the same two portions as were in the simple mode as shown in the picture :

The only addition is that that housing cost portion is further divided into four parts:

  1. Principal loan amount
  2. loan interest
  3. property tax
  4. insurance.

Housing cost is the combination of all these four portions.

Putting values in the income and housing cost portions are mandatory; otherwise, front end ratio and back end ratio portions will give no results.

You can put the total value of the housing cost directly in the housing cost portion, or you can put an individual's values in the four portions of housing cost to arrive at the total amount of housing cost. Put values in the income and the four portions of housing cost, and we will get the following results for the front end ratio and back end ratio.

Both the ratios are exceeding their standard, i.e., 28% and 36%, so the bank will not lend you a loan, or if they give you a loan, it will be on such high-interest rate that it will not be feasible to take the credit. The 14,500 amount in the housing portion is the combination of (1,000+2,000+1,000+1,500).

 

Formulas used in 28/36 Home affordability Calculator

There are three formulas used in 28/36 rules calculator or home affordability calculator

-         Total debt

-         Front end ratio

-         Back end ratio

 

Total debt

Total debt is a combination of housing costs and other debts.

Example 1

An individual A has a monthly income of $10,000 while he has home finance of $1,200 and a car loan of $1500.

Solution

              Housing cost = $1,200

             Other debts = $1,500

          Total debts = 1,200+1,500= $2,700

Total debts = $2,700

 

Front end ratio

The ratio between housing cost and income is called the front end ratio. The formula of the front end ratio is (Housing cost/Income).

Example

In the example above, an individual A has a monthly salary of $10,000, and his home finance amount to $1,200 while his car loan is $1,500.

Solution

              Monthly income = $10,000

              Home financing cost = $1,200

              Front end ratio = Housing cost/Income

                                         = 1,200/10,000= 0.12 or 12%

 Front end ratio = 12%

 

Back end ratio

The ratio between total debt and income is called the back end ratio. This ratio is also called debt to income ratio. The formula of the back end ratio is (Total debt/Income).

Example

In the above example, total debt is $2,700, and the monthly income is $10,000, putting these values in the back end formula we will get 

Total debt = $2,700

Monthly income = $10,000

Back end ratio = total debt/Income

                             = 2,700/10,000 = 0.27 or 27%

Back end ratio = 27%

 

FAQS

Question: How do you calculate home affordability?

Answer: Home affordability can easily be calculated through the home affordability calculator. The calculator follows the 28/36 rule, which states that your housing cost should not exceed 28% of your income, and total debt should not exceed 36% of your income.

Example: An individual has a monthly income of $8,000, so according to 28/36 rule, his housing cost should not be more than $2,240 (8,000*.28= $2,240), and his total debt should not be more than $2,880 (8,000*.36= $2,880).

 

Question: Can I afford 50k, 100k, 200k, etc. house?

Answer: It depends on your income and 28/36 rule. If you are fulfilling the conditions mentioned in the 28/36 rule, then you can easily afford any type of house; otherwise, it will be difficult.

Example: An individual has a monthly salary of $8,000.According to 28/36 rule, his housing cost should not be more than $2,240 (8000*.28= $2,240). Let suppose if his housing cost is exceeding this amount, then it will be tough for him to take a loan from banks because he is not in the range of $1-$2,240.In his current income, he can borrow an amount up to $2,240, not more than this.

 

Question: How much house can I afford if I make $100,000, @200, 0000, etc. a year?

Answer:  If a person earns $100,000 yearly, his monthly salary will be 100,000/12= $8,333. According to rule, his housing cost should not be more than $2,333 (8333*.28= $2,333), so you have the leverage of $2,333 monthly to make your own home not more than this. If someone earns $8,333 monthly, he/she can borrow up to $2,333 monthly to make his/her own home.

 

Question: How much income do I need to make for a 50k, 100k 150k, etc. mortgage? 

Answer: You can use the trial and error method in the home affordability calculator. Put the intended value of the mortgage in the housing cost portion of the home affordability calculator and put any random amount of income in the income portion. Change the value of income until the front end ratio and back end ratio fall below the threshold of 28% and 36%, respectively.

 

Example: A person finances his home with a loan of $ $50,000, how much income he must earn?

Solution: Put the value of $50,000 in the housing cost portion of the home affordability calculator and put any random amount of income in the income portion. The value of the income at which the front end and back end ratios fall below 28% and 36%, respectively, is the amount which a person should earn to finance his home with a $50,000 mortgage. The following picture will clear the confusion if there is any.

At $180,000 amount of income, the front end back end ratios are below 28% and 36%, respectively. To mortgage home with a $50,000, an income must be $180,000 or more.

 

Question: What percentage of salary should be mortgage?

Answer: 28/36 rule should be followed for mortgaging. According to this rule, the loan amount should not exceed 28% of your income, and the total debt should not exceed 36% of your income. If your income is not enough to support the 28/36 rule, then you are not eligible for a mortgage, or the loan will be at a rate where it will be practically impossible to take any credit.

 

Question: Is the Income amount is pre-tax or after-tax?

Answer: The income amount in the home affordability calculator is pre-tax, i.e., tax is not deducted from the income.

Example: An individual pre-tax income is $10,000, while after-tax income is $9,000.You will put the value of pre-tax income, i.e., $10,000 in the home affordability calculator.

 

Question: What is debt to income ratio and cost to income ratio

Answer: Back end ratio is also called debt to income ratio, and the formula of debt to income ratio is (Total debt / Income). Front end ratio is also called cost to income ratio. The formula of cost to income ratio is (Housing cost / Income).

 

Question: What is PITI in the home affordability calculator?

Answer: PITI is the abbreviation of

P= principal loan amount

I= Loan interest

T= property tax

I= Insurance.

PITI is present in the advance mode of a home affordability calculator.

 

Question: What does the high front end ratio mean?

Answer: A high front end ratio means that the ratio is above 28%, which is not an acceptable level because 28% is a standard. A front end ratio above 28% will compel the banks to give you the loan at the high-interest rate or reject your loan application. The basic reason for the high front end ratio is that your income is low and you are financing your home with a loan which is more as compare to your income. So the solution of high front end ratio is that that finance your home with such a loan whose amount is low as compare to your income, i.e., the loan amount should be 28% or less of your income.

Example: There are two individuals A and B. The income of A is $10,000, and the income of B is also $10,000.The housing cost of A is $$4,000, while that of B is $2,500. Whose front end ratio will be more and why

Solution

                Income A = $10000

               Housing cost of A = $40000

Front end ratio = Housing cost / Income

                           = 40000 / 10000 = 0.4 or 40%

Front end ratio A = 40%

Income B= $10000

Housing cost of B= $2500

Front end ratio = housing cost / Income

                           = 2500 / 10000 = 0.25 or 25%

Front end ratio = 25%

The front end ratio of individual A is more because he is financing his house with a loan, which is very expensive, and his income is not enough to decrease the front end ratio to the acceptable level, which is 28% or below.

While the front end ratio of individual B is in the boundary of an acceptable level, i.e., below 28%, because he is financing his house with a loan which is not expensive and his income can bear the burden of the loan.