How to Use the 28/36 Rule for HELOC Affordability

What is the 28/36 Rule?

The 28/36 rule is a widely used guideline in mortgage lending that helps determine how much debt a borrower can reasonably afford. It's based on two key ratios that measure your debt-to-income (DTI) ratio:

How to Calculate Your Ratios

Step 1: Calculate Your Gross Monthly Income

Add up all sources of income before taxes:

• Salary or wages
• Bonuses and commissions
• Self-employment income
• Rental income
• Investment income
• Other regular income sources

Step 2: Calculate Your Housing Costs

Include all housing-related expenses:

• Primary mortgage payment (principal + interest)
• Property taxes
• Homeowners insurance
• Private mortgage insurance (PMI)
• HOA fees
• HELOC payments (current or projected)

Step 3: Calculate Your Total Debt Payments

Include all monthly debt obligations:

• All housing costs (from Step 2)
• Credit card minimum payments
• Car loan payments
• Student loan payments
• Personal loan payments
• Other loan payments

Practical Example

Let's say you have the following financial situation:

Applying the 28/36 Rule to HELOCs

Before Taking a HELOC

Calculate how a HELOC would affect your ratios:

What This Means

In this example, adding a HELOC would push both ratios above the recommended limits, indicating that you might be overextending yourself financially. Consider:

• Reducing the HELOC amount
• Paying down other debts first
• Increasing your income
• Waiting until your financial situation improves

Exceptions and Considerations

When the 28/36 Rule Might Not Apply

• High-income borrowers: May be able to handle higher ratios
• Stable employment: Government employees or tenured professionals
• Significant assets: Large savings or investment accounts
• Low expenses: Minimal other financial obligations

Additional Factors to Consider

• Emergency fund: 3-6 months of expenses saved
• Job security: Stable employment situation
• Future expenses: Upcoming major costs or life changes
• Interest rate environment: Potential for rate increases

Tips for Improving Your Ratios

To Lower Your Housing Ratio:

• Pay down your primary mortgage
• Refinance to a lower rate
• Reduce property taxes through appeals
• Shop for lower insurance rates

To Lower Your Total DTI:

• Pay off high-interest credit cards
• Consolidate debts at lower rates
• Increase your income
• Avoid taking on new debt

Using the Rule for HELOC Planning

Frequently Asked Questions

What is the 28/36 rule for HELOC affordability?

The 28/36 rule suggests that housing costs (including HELOC payments) should not exceed 28% of gross monthly income, and total debt payments should not exceed 36% of gross monthly income.

Can I get a HELOC if I exceed the 28/36 rule?

Some lenders may approve HELOCs for borrowers who exceed these ratios, especially if you have strong credit, stable income, or significant assets. However, it increases your financial risk.

How do I calculate my debt-to-income ratio for a HELOC?

Add all your monthly debt payments (including projected HELOC payments) and divide by your gross monthly income. Multiply by 100 to get the percentage.