What’s the 28 rule when buying a home? If you’re planning to buy a home in New Jersey, the 28 rule provides a critical framework for determining how much house you can realistically afford. Understanding this rule can prevent the common pitfall of becoming “house poor” – where housing costs consume an unsustainable portion of income.
In this blog post, New Jersey realtor Nancy Kowalik and the professionals at Your Home Sold Guaranteed Realty - Nancy Kowalik Group will discuss what the 28 rule is when buying a home.
Key Takeaways:
- The 28 rule recommends spending no more than 28% of your gross monthly income on housing expenses.
- Housing expenses include mortgage principal, interest, taxes, insurance, and potential HOA fees.
- This guideline helps prevent financial overextension and provides a benchmark for responsible home buying.
What’s The 28 Rule?
South Jersey real estate expert Nancy Kowalik explains,
“The 28 rule is essentially a financial guardrail that helps buyers understand their true housing affordability. It’s not just about what a bank will lend you, but what makes sense for your long-term financial stability.”
At its core, the 28 rule states that you should spend no more than 28% of your gross monthly income on housing expenses.
This percentage, also known as the front-end ratio, encompasses more than just your mortgage payment. It also includes:
- Property taxes
- Homeowners insurance
- Homeowners Association (HOA) fees, if applicable
Combined with your principal and interest payments, these four expenses are often abbreviated as PITI (principal, interest, taxes, and insurance).
How to Calculate the 28 Rule
Implementing this guideline is relatively straightforward. To determine your maximum housing expense, it only takes two steps:
- Calculate your total gross monthly income
- Multiply that figure by 0.28 (28%)
For instance, if your gross monthly income is $8,000, your maximum housing expense would be $2,240 ($8,000 x 0.28). This means all your housing-related costs should not exceed this amount.
Kowalik notes,
“While the 28 rule provides an excellent starting point, it’s crucial to consider your entire financial picture, including other debts, savings goals, and lifestyle expenses.”
The 28 rule is often paired with the 36 rule, which suggests that your total monthly debt payments– including housing costs and other obligations like car loans, student loans, and credit card payments– should not exceed 36% of your gross monthly income.
Flexibility and Considerations
It’s important to understand that the 28 rule is a guideline, not a strict mandate:
- Not all lenders apply this rule rigidly
- Strong credit scores or substantial assets might allow for slight variations
- Government-backed loans may have different debt-to-income ratio requirements
Why the 28 Rule Matters
The primary purposes of the 28 rule are:
- Preventing financial overextension
- Providing a framework for responsible borrowing
- Ensuring buyers maintain financial flexibility for other life expenses and savings
In New Jersey’s competitive real estate market, where home prices can vary significantly by county and municipality, the 28 rule becomes an even more critical tool. It can help you evaluate different areas like Bergen, Essex, and Monmouth Counties and determine a realistic budget that accounts for property taxes and insurance costs in each location.
Potential Limitations
While valuable, the 28 rule isn’t perfect. It doesn’t account for:
- Individual financial circumstances
- Future income potential
- Specific regional cost variations
- Personal financial goals and lifestyle preferences
Overall, this rule serves as a fundamental guideline for responsible home buying, offering a simple yet effective method for assessing housing affordability.
By understanding and applying this principle, you can make more informed decisions, reduce financial stress, and set yourself up for long-term housing success.
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At Your Home Sold Guaranteed Realty - Nancy Kowalik Group, Nancy Kowalik and our team have years of experience working with home buyers in Mullica Hill and South Jersey. Our team can easily help you buy a house in Mullica Hill or the surrounding areas.
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Give us a call at (856) 478-6562 to learn more about why we’re the best realtor in South Jersey. You can also use the form below. Don’t have to wait to make your real estate dreams come true!
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Self-employed individuals can use this rule, but they may face additional scrutiny from lenders due to their variable income. Lenders typically average your income over the past two years and may require more documentation to verify your earnings if you’re self-employed. Maintaining consistent income and having a strong credit score can help offset potential challenges.
Different mortgage types have varying guidelines, but the 28 rule is a general financial best practice across most loan programs. Government-backed loans from the FHA might have more flexible requirements, while conventional loans tend to adhere more strictly to this guideline. Always consult with a mortgage professional to understand specific requirements or guidelines for your situation.