What does the '36' in the 28/36 ratio signify?

The '36' in the 28/36 ratio signifies the combined total of monthly debt payments as a percentage of gross income. This ratio is a guideline used by lenders to assess a borrower's ability to manage their debt load. The first number, '28,' refers to the percentage of gross income that can be allocated to housing expenses, including mortgage payments, property taxes, and homeowners insurance. The second number, '36,' denotes the total percentage of gross income that should not be exceeded when all monthly debt payments are considered, which includes housing costs and other debts like credit card payments, car loans, and student loans.

Understanding this ratio is essential for financial counseling because it helps individuals maintain a healthy debt-to-income ratio, which is crucial for securing loans and maintaining financial stability. It guides clients in how much they can afford to borrow and manage responsibly. Thus, recognizing the significance of the '36' is fundamental in the context of personal finance and lending practices.