🔥 Why the 28% Rule is Outdated (And What to Use Instead)

The 28% rule is killing homeownership dreams across America. This outdated financial guideline, created in the 1960s when houses cost 2-3 times annual income, is now being applied to a market where houses cost 6-8 times annual income. The result? Millions of qualified buyers are being told they can't afford homes they actually can, while others are being approved for mortgages that will destroy their financial futures.

After helping over 100,000 people through the Can I Afford platform, I've seen firsthand how the 28% rule fails in today's market. It's time for a new approach that actually works in 2024.

Reality Check: In 1960, the median home cost $11,900 and median income was $5,600 (2.1x ratio). Today, median home costs $400,000+ and median income is $70,000 (5.7x ratio). The 28% rule wasn't designed for this reality.

Why the 28% Rule is Dangerous in 2024

The 28% rule states that your housing payment shouldn't exceed 28% of your gross monthly income. Sounds reasonable, right? Here's why it's actually harmful:

Problem #1: It Ignores Your Complete Financial Picture

The 28% rule only looks at your income, completely ignoring your debt, savings, lifestyle, and financial goals. A person making $100,000 with no debt and $200,000 in savings is treated the same as someone making $100,000 with $50,000 in credit card debt and no savings.

This makes no sense. Your ability to afford a home depends on your entire financial situation, not just your income.

Problem #2: It Assumes All Income is Equal

The rule treats a teacher's $60,000 salary the same as a commission salesperson's $60,000 average. But stable income and variable income require completely different approaches to housing affordability.

Problem #3: It Ignores Regional Cost Differences

Someone making $80,000 in Kansas City has vastly different housing options than someone making $80,000 in San Francisco. The 28% rule treats them identically, which is absurd.

                    The Truth: The 28% rule was created by government agencies to simplify mortgage underwriting, not to help individuals make smart financial decisions. It's a one-size-fits-all solution in a world where one size fits nobody.
                

The New Formula That Actually Works

Instead of the outdated 28% rule, use the Total Cost of Ownership (TCO) approach. This considers your complete financial picture and gives you a realistic assessment of what you can actually afford.

Step 1: Calculate Your True Available Income

Start with your take-home pay (not gross income). Subtract:

• Essential expenses (food, transportation, insurance, minimum debt payments)

• Savings goals (retirement, emergency fund, other goals)

• Lifestyle expenses you won't give up

What's left is your available housing budget.

Step 2: Factor in ALL Housing Costs

Don't just look at principal and interest. Include:

• Property taxes

• Insurance

• HOA fees

• Maintenance and repairs (budget 1-2% of home value annually)

• Utilities

• Opportunity cost of down payment

Step 3: Apply the Stress Test

Can you still afford the payment if:

• Interest rates rise 2% at renewal?

• You lose your job for 6 months?

• Major repairs are needed?

• Your income drops 20%?

If you can't pass these stress tests, you can't afford the house, regardless of what any rule says.

Pro Tip: Use our free house affordability calculator at caniafford.online/house/ to run these calculations automatically. It considers your complete financial picture, not just the outdated 28% rule.

Real-World Examples: Why the New Approach Works

Example 1: Sarah the Software Engineer

Income: $120,000 gross ($7,200 take-home)

28% Rule Says: $2,800 max housing payment

Reality: No debt, $150,000 saved, stable job, minimal expenses

TCO Approach: Can afford $4,000+ housing payment

The 28% rule would force Sarah into a starter home when she can easily afford her dream house.

Example 2: Mike the Sales Manager

Income: $100,000 gross (variable)

28% Rule Says: $2,333 max housing payment

Reality: $40,000 credit card debt, variable income, expensive lifestyle

TCO Approach: Can afford $1,500 max housing payment

The 28% rule would approve Mike for a mortgage that would destroy his finances.

The Smart Person's Housing Formula

Here's the formula I recommend to clients:

                    Maximum Housing Payment = (Take-Home Pay - Essential Expenses - Savings Goals - Lifestyle Expenses) × 0.8
                    
                    The 0.8 factor provides a 20% buffer for unexpected expenses and gives you breathing room.

How to Apply This Formula

Step 1: Track your spending for 3 months to understand your true expenses.

Step 2: Categorize expenses as essential, savings, or lifestyle.

Step 3: Apply the formula to find your maximum housing payment.

Step 4: Work backwards to find the maximum home price you can afford.

Step 5: Run stress tests to ensure you can handle financial shocks.

Special Considerations for 2024

Rising Interest Rates

With rates potentially rising, factor in renewal risk. If you're getting a 5-year mortgage at 6%, can you afford payments at 8%?

Inflation Impact

Your housing payment is fixed, but everything else (food, gas, utilities) keeps getting more expensive. Build in an inflation buffer.

Remote Work Changes

If you work remotely, you might afford more house by moving to a lower-cost area. Factor this into your calculations.

Warning: Don't let real estate agents, mortgage brokers, or banks tell you what you can afford. They make money when you buy, regardless of whether it's smart for you. Do your own math.

The Bottom Line

The 28% rule is a relic from a different era. In today's market, you need a more sophisticated approach that considers your complete financial picture.

Some people can safely spend 40%+ of their income on housing. Others shouldn't spend more than 20%. The difference isn't their income – it's their complete financial situation.

Stop letting an outdated rule from the 1960s determine your housing decisions. Use the Total Cost of Ownership approach to make smart decisions based on your actual financial reality.

Your future self will thank you for taking the time to do the math properly instead of blindly following rules that don't apply to your situation.

Ready to find out what you can actually afford? Use our advanced house affordability calculator at caniafford.online/house/ – it goes far beyond the outdated 28% rule to give you a realistic assessment based on your complete financial picture.