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What Percentage of Your Income Should Go to Mortgage Payments?

9-Minute Read
Published on January 13, 2022

If you’re a first-time home buyer, you might run into trouble deciding how much home you can afford. One of the biggest hurdles that first-time buyers face is calculating what percentage of income should go to mortgage payments each month. You might have heard that you should spend about 28% of your gross monthly income on your mortgage – but is this percentage right for everyone? Let’s take a closer look at how much of your income should go to your mortgage.

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What Percentage Of Income Should Go Toward A Monthly Mortgage Payment?

Every homeowner’s situation is different, so there’s no hard and fast rule about how much money you should be spending on your mortgage each month. Still, experts do have some words of wisdom to help make sure you don’t end up stretching your housing budget too thin.

The 28% Rule For Mortgage Payments

The often-referenced 28% rule says that you shouldn’t spend more than that percentage of your monthly gross income on your mortgage payment, including property taxes and insurance. This 28% is often referred to as a safe mortgage-to-income ratio, or a good general guideline for mortgage payments.

Keep in mind: Gross income is your total household income before you deduct taxes, debt payments and other expenses. Lenders typically look at your gross income when they decide how much you can afford to take out in a mortgage loan.

The 28% rule is fairly easy to figure out. Let’s say your household brings in a total of $5,000 every month in gross income. Multiply your monthly gross income by .28 to get a rough estimate of how much you can afford to spend a month on your mortgage. In this example, you shouldn’t spend more than $1,400 on your monthly mortgage payment if you’re following the 28% rule.

Homeowners often use the 28% rule because it strikes a good balance between buying the home they want and keeping money in their budget for emergencies and other expenses. However, it’s important to remember that you don’t need to spend up to your monthly limit. Think of 28% as the ideal amount you should spend monthly on your total mortgage payment. Remember to include your principal, interest, taxes, insurance and (if applicable) homeowners association (HOA) dues in your total before you take out a home loan.

28/36 Rule

You know about the 28% rule, but what exactly is the 28/36 rule? As previously mentioned, the 28% rule means that you shouldn’t spend more than that percentage of your monthly income on a mortgage payment as a homeowner. You then shouldn’t spend more than 36% on all your other debt (house debt, car loans, credit cards, etc.). This is another good guideline to use if you’re trying to determine how much you can afford without stretching your budget.

The 35%/45% Model

The 28% rule isn’t universal. Some financial experts recommend other percentage models, like the 35%/45% model. This rule says you shouldn’t spend more than 35% of your pre-tax income or 45% of your after-tax income on your total monthly debt, which includes your mortgage payment.

For instance, let’s say your household income is $5,000 before taxes and $4,000 after you deduct taxes. In this example, you should put your upper limit for monthly payments between $1,750 – $1,800 per month.

The 35%/45% model gives you more money to work with when you calculate how much you can afford to spend each month on your loan. A higher monthly budget means you can buy a larger, more expensive property. It also means you can take a shorter loan and pay off your home sooner. This model can be particularly useful in areas with high local and state tax rates, too.

The 25% Post-Tax Model

The more conservative 25% model says you should spend no more than 25% of your post-tax income on your monthly mortgage payment. For example, if you earn $4,000 after tax deductions, you’d spend a maximum of $1,000 a month on your mortgage.

The 25% model might be right for you if you have other forms of debt. When you spend less on your monthly housing payment, you have more money to pay down student loans, auto loans, personal loans or other debt. The obvious downside of this model is that it gives you less money to spend on your home.

How Will A Lender Calculate How Much I Can Afford?

Lenders don’t just look at your gross income when they decide how much you can afford to take out in a loan. Your debt-to-income ratio (DTI) also plays a major role in the process.

Your DTI ratio is a percentage that tells lenders how much of your monthly income goes toward debt. Lenders use your DTI when they calculate how much you can afford to pay on your mortgage every month. A higher DTI means that you’re a riskier candidate for a mortgage because you have less disposable income. This means it’s more likely that you might miss a mortgage payment if you lose your job or run into financial hardship.

Calculating Your Debt-To-Income Ratio

When it comes to calculating your DTI, you’ll add up your fixed monthly expenses. Only minimum payments count toward your DTI. For example, if you have $15,000 worth of student loans but you only need to pay $200 a month, you’d include $200 in your debt calculation. Don’t include variable expenses (like utilities and transportation costs) in your calculation.

After you add up all of your debts, divide your monthly debt obligation by your gross monthly income. Then, multiply the result by 100 to get your DTI. If your DTI is more than 43%, you might have trouble finding a mortgage loan.

Your DTI and income are only two of the factors that your lender considers when they calculate what type of monthly payment you can afford. If you have a higher credit score or a larger down payment, you may still qualify for a loan even if you have more debt or a lower income. The options available to you will depend on your mortgage lender’s standards.

Remember that the 28% “rule” is only a suggestion to keep your monthly payment affordable. The specific percentage of income that you’ll spend on your mortgage depends on your unique household budget and how much debt you have. However, the 28% suggestion is a great jumping-off point when you start to shop for a home loan.

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What Is My Mortgage-To-Income Ratio?

If you have more debt, you might struggle to keep your DTI low while also paying off a mortgage. In this case, it can be useful to work backwards before you decide on a percentage of income for your mortgage payment.

Calculating Your Mortgage-To-Income Ratio

To calculate your mortgage-to-income ratio, multiply your monthly gross income by .43 to determine how much money you can spend each month to keep your DTI ratio at 43%. You’ll then subtract all of your recurring, fixed monthly debt obligations and minimum payments on credit cards and other lines of credit. The dollar amount you have left after subtracting all of your debts lets you know how much you can afford to spend each month on your mortgage.

Mortgage Payment Percentage Example

Imagine that your household brings in $5,000 in gross monthly income. Your recurring debts are as follows:

  • Rent: $500
  • Minimum student loan payment: $250
  • Minimum credit card payment: $200
  • Minimum auto loan payment: $300

In this example, your total monthly debt obligation is $1,250. With quick math, we find that 43% of your gross income is $2,150, and your recurring debts take up 25% of your gross income. This means that if you want to keep your DTI ratio at 43%, you should spend no more than 18% ($900) of your gross income on your monthly payment.

Considering that you already spend $500 a month on rent, if you add that to the $900, you can estimate a maximum monthly mortgage payment of $1,400. Use a home affordability calculator and your estimated monthly payment to calculate how much money you can borrow and stay on budget.

Additional Homeownership Costs To Consider

There may be additional housing costs that go along with owning and maintaining a home that you haven’t considered when calculating your monthly expenses, especially if you are a first-time home buyer. When trying to determine how much you can afford to spend on a mortgage, it is important to consider all of the expenses you may have, even if they don’t apply yet. Some easily forgotten expenses that can accompany owning a home include:

How To Get A Lower Monthly Mortgage Payment

If you’ve got more debt, you might need to take on a lower monthly payment to keep your DTI at 43%. Thankfully, there are a few strategies you can use to lower your monthly payment.

Although there are many tips and tricks to lowering your monthly mortgage payment, you can use the following process to help stick to your budget.

Step 1: Check Your Credit Report

One of the first factors that lenders consider when they decide how much you’ll pay in interest is your credit score. The higher your score, the lower interest rates you’ll qualify for. But before you work on improving your credit score, you should first get a copy of your credit report.

Carefully review your personal information and each entry to confirm there are no errors. If you do find discrepancies, you can dispute the inaccurate information with the credit bureau you received the report from.

You can also use your payment history to ensure that you don’t have any outstanding bills that need to be paid. Simply paying off an outstanding account or correcting an error can make a noticeable difference in your credit score.

Step 2: Consider A Longer Mortgage Term

The longer your mortgage term, the lower your monthly payment. If you take a longer term, you spread your payments over a larger number of months and years, which reduces the amount you’ll owe each month. While taking a longer term will increase the amount you pay in total interest over time, it can free up monthly cash to keep your DTI low.

To find a term length that best fits your budget, you can use a mortgage calculator to check the affordability of each option. You can also experiment with different amounts of down payments and interest rates.

Step 3: Save For A Larger Down Payment

You don’t need to pay for private mortgage insurance (PMI) when you put 20% down on your loan. PMI can add quite a bit of money to your monthly payment, so avoiding it can significantly reduce what you pay each month.

You may be able to avoid paying for mortgage insurance if you qualify for a VA loan and pay the funding fee upfront (or have the funding fee waived if you qualify).

On the other hand, if you’re using an FHA loan, you’ll be required to pay a mortgage insurance premium (MIP) for the entire repayment term, unless you make a 10% down payment. In that case, you can cancel your MIP payments after 11 years.

Step 4: Find The Best Interest Rate

When you’re finally ready to apply for a mortgage, you can take the opportunity to compare multiple loan estimates between lenders. Getting prequalified and comparing options is an extra step that some home buyers skip, but it may well be worth the effort.

Different lenders and types of loans come with different mortgage rates. So, if you want to lower your monthly payment, securing the lowest possible interest rate could help.

Mortgage-To-Income Ratio FAQs

Why do lenders use my gross income for determining a mortgage payment?

Your gross monthly income is specific to your personal situation and is a reliable figure lenders can use to gauge your financial health. By comparing your gross income to your fixed monthly debt payments, a lender can quickly calculate how much breathing room you have in your budget for another payment.

What does the term “house poor” mean?

The phrase “house poor” refers to borrowers who spend the majority of their income on their homes. A too-large mortgage payment, expensive maintenance costs or high property taxes could make a homeowner house poor. To avoid this problem, you can make sure your housing costs don’t push you over the 43% DTI ratio or take more than 28% of your gross monthly income.

Can I still get a mortgage if my DTI is above 43%?

Depending on the type of mortgage you use and the lender you apply to, you may be able to qualify for financing with a higher DTI. Some banks, credit unions or online lenders will approve a borrower with a high DTI if they make a large down payment or have a substantial amount of cash reserves.

The Bottom Line: How Much Home Can You Afford?

So, what percentage of your income should go toward your mortgage? The answer will vary depending on your income and how much debt you have. But your income is only one of the many factors that determine how much home you can afford. Lenders look at everything from your credit score to your liquid assets when they decide how much to offer you.

If you’re ready to get started on your mortgage application, you can apply online or give us a call at (888) 452-0335.

Apply for a mortgage today!

Apply online for expert recommendations with real interest rates and payments.

Start Your Application
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Lauren Nowacki

Lauren is a Content Editor specializing in personal finance and the mortgage industry. Her writing focuses on reporting the best places to live in the U.S. based on certain interests and lifestyles. She has a B.A. in Communications from Alma College and has worked as a writer and editor for various publications in Philadelphia, Chicago and Metro Detroit.