What Percentage Of My Income Should Go To My Mortgage?

When buying a home, your earnings play a major part in determining how much home you can afford. You’ll need to have sufficient income to prove to the lender that you can make your mortgage payments on time.

There are different rules and standards to follow, but there’s no one-size-fits-all method when it comes to how much of your income should go to a mortgage payment. Here’s what to consider before deciding which method works for you.

What Percentage Of Your Income Should Go to Your Mortgage?

There are a few different more popular models for determining how much of your income should go to your mortgage.

28% Mortgage Rule

The 28% rule says that you shouldn’t pay more than 28% of your monthly gross income on mortgage payments—including taxes and homeowner’s insurance. Gross income is what you make before taxes are taken out.

Example: Let’s say you earn $7,000 every month in gross household income. Multiply that by 28% and that’s about what you can expect to spend on your monthly mortgage payment every month. So with a $7,000 gross income, your monthly home payment should be about $1,960 using the 28% model.

28/36 Mortgage Model

The 28/36 rule is an addendum to the 28% rule: 28% of your income will go to your mortgage payment and 36% to all your other household debt. This includes credit cards, car loans, utility payments and any other debt you might have.

Example: With a $7,000 gross income, 36% would be $2,520. Along with your $1,960 mortgage payment, you’re left with $2,520 to cover other needs.

35/45 Mortgage Model

Using the 35/45 method, no more than 35% of your gross household income should go to all your debt, including your mortgage payment. Another way to calculate, though, is no more than 45% of your net pay—or after-tax dollars—should go to your total monthly debt.

Example: With a $7,000 monthly gross income, 35% would be $2,450 for all your debt. But let’s say after taxes, insurance and other deductions, your take-home pay is $6,000. Multiply that by 45% and that’s $2,700. So your range (for all your debt) would be between $2,450 and $2,700.

25% Post-Tax model

While some other rules use your gross income as a starter, this one uses your net income for calculations. It says that 25% of your income after taxes will go to your home payment.

This model gives you the least amount of money to put towards your home payment. If you’re looking for a home soon but have a lot of outstanding debt, like a car payment, student loans or credit cards, this method might be best for you so you don’t bite off more than you can chew.

Example: So if your take-home pay is $6,000 a month, your monthly mortgage payment shouldn’t exceed $1,500.

How To Determine How Much House You Can Afford

Most people use a mortgage to buy a home, but everyone’s income and expenses are different. Because of this, you’ll want to calculate your potential monthly payment based on your current financial situation. You’ll need to calculate some figures like:

• Income. This is how much you earn on a monthly basis from your regular day job and any side hustles you have. Make sure you have gross and net numbers at the ready. You can find these on your most recent pay stub. If you have a fluctuating income, use your most recent tax returns for guidance.
• Debt. Debt consists of what you currently owe money on. This would include things like credit cards, student loans, car loans, personal loans and other types of debt. Debt isn’t the same as expenses, which might fluctuate month-to-month (like food and gas, for example).
• Down payment. This is how much cash you’ll pay up-front for the cost of a home. A 20% down payment might remove private mortgage insurance (PMI) charges from your monthly costs, but it’s not always required to buy a home. The higher your down payment, however, the lower your monthly mortgage payment will be.
• Credit score. Having good or excellent credit means you can get the lowest interest rate available offered by lenders. A high interest rate typically means a higher monthly payment.

How Lenders Decide How Much You Can Afford

Lenders use a few different factors to see how much home you can afford. They use your debt-to-income ratio, or DTI, to make sure you can comfortably pay your mortgage as well as your other debt. This includes credit cards, car loans, student loan payments and more.

You can calculate your DTI ratio by adding up all your debt payments and dividing it by your gross monthly income. Say your monthly income is $7,000, your car payment is $400, your student loans are $200, your credit card payment is $500 and your current home payment is $1,700. All that together is $2,800. So, your DTI ratio is 40% since $2,800 is 40% of $7,000.

In general, a good DTI to aim for is between 36% and 43%. Some lenders will go higher, but the lower your DTI, the more likely you are to be pre-approved for a mortgage. Different lenders have different DTI requirements, though, so compare multiple mortgage lenders to find one that works for you.

How To Lower Your Monthly Mortgage Payment

Your monthly mortgage payment is going to take up a good chunk of your overall debt, so anything you can do to lower that payment can help. Consider some options, like:

• Find a less expensive house. While your lender might approve you for a loan up to a certain amount, you don’t necessarily have to buy a home for the full amount. The lower the home price, the lower your monthly payments will be.
• Boost your down payment. The higher your down payment, the lower your monthly payment will be. If you can, save up to secure that lower payment.
• Get a lower interest rate. Most of the time, your interest rate is based on your credit score and DTI. Try to pay down outstanding debt, like credit cards, car loans or student loans. This not only lowers your DTI, but could also improve your credit score. A higher credit score means you could get a lower interest rate offered by your lender.
• Avoid mortgage insurance. Conventional mortgages require PMI until you have at least 20% equity. Additionally, you may want to steer clear of Federal Housing Administration (FHA) loans and U.S. Department of Agriculture (USDA) loans, which can require mortgage insurance for the life of the loan.

Kevin Estes, an hourly financial planner and founder of Scaled Finance, suggests that you exceed the minimum credit, income and cash requirements when possible. Estes also recommends getting quotes from at least two lenders.

When purchasing a personal residence, he and his wife worked with two lenders to get a better rate. “In the ensuing bidding war, we negotiated everything—interest rates, closing costs, points, lender credits and even prepaid expenses.”

Ultimately, the Estes family was able to negotiate a 0.25% rate discount and didn’t have to pay discount points the lender originally required.

Other Homebuying Costs To Consider

Buying a home is typically the most expensive purchase someone makes in their lifetime. On top of that, other small fees can really add up that can increase the total cost of that purchase. You’re also on the hook for other costs, like:

• Regular maintenance. You’ll need to maintain your home. And sometimes that means ongoing upkeep for extras like a pool. On top of regular pool maintenance, there’s also the patio or deck the pool sits in, which might need annual pressure washing, for example.
• Lawn care. If your community doesn’t pay for a lawn maintenance crew, you’re on your own for all your lawn and hedging care. This means hiring a company to do it for you or buying the proper tools to do it yourself.
• Home improvements and repairs. This could be anything from a new garage door to changing kitchen cabinet handles. It could also be a new toilet or a new roof.

When you’re on the hunt for a home, a completed inspection report will let you know any major concerns to pay attention to. If some items are out of date, you could use those as negotiating tools to lower the cost of the home price or get new ones installed before purchasing.

Frequently Asked Questions (FAQs)