What Percent of Your Income Should Go Towards Your Mortgage?
The Bottom Line
While experts recommend spending no more than 36% of your income on housing and debt payments, it can be an unrealistic number in many markets. Lenders allow up to 50% or higher in some cases.
When shopping around for a home and a mortgage loan, it’s important to know your realistic budget and what you can afford. What percent of net income should go to mortgage payments versus gross income? What factors can impact your affordability? And how do you determine what you can afford?
For answers, read on and learn more about several major rules of thumb you can follow, including the 28/36 rule, 25% post-tax rule, and 43% debt-to-income (DTI) ratio rule, as well as various factors that affect affordability, and ways you can decrease your monthly payments.
Terms to Know
Before diving in and attempting to determine what percent of monthly income should go to mortgage payments, it’s a good idea to understand and remember key terms. Here’s a breakdown.
Gross Income and Net Income
Gross income is your total income before taxes and deductions. Lenders use this number to calculate your debt-to-income ratio (more on that next).
Net income is what you take home in earnings after taxes and deductions – the amount you can actually spend or save.
Debt-to-Income Ratio
Your debt-to-income (DTI) ratio is the percentage of your income that you need to meet minimum debt payments each month.
For mortgage lenders, there are two types of DTI: Front-end and back-end.
Payments factored in front-end DTI:
Mortgage principal and interest payment
Property taxes
Homeowner’s insurance
HOA dues
Payments factored into back-end DTI:
Car loans
Student loans
Personal loans
Minimum required credit card payments
Medical debt payments if on a payment plan
Child support or alimony payments
Other debt payments, even if not on your credit report
Not factored into DTI:
Grocery bills
Utility bills
Streaming services
Car insurance premiums
Cell phone
Other non-debt payments
“Be aware that, if a debt is nearly paid off, lenders may choose to exclude it from your DTI – but this will depend on the remaining balance and payment terms.
For example, if you have a car loan with $1,200 left to pay and monthly payments of $300, some lenders might disregard it if the balance will be paid off within six months.”
Related: DTI limits for FHA and conventional loans and USDA loans.
The 28/36 Rule
One of the most widely-used rules to follow recommended by lenders and experts alike is the 28/36 rule.
“This means that no more than 28% of your gross monthly income should apply to housing costs, and no more than 36% of your gross monthly income should go toward total debt. It’s a helpful baseline to follow, although it doesn’t always reflect the reality of modern budgets,” says Reilly James Renwick, chief marketing officer at Pragmatic Mortgage Lending.
Let’s say your gross monthly income is $6,000. Following the 28/36 rule, in this example your housing costs should not exceed $1,680 and your total debts should stay below $2,160.
“However, rising home prices and stagnant wages make this rule challenging and unrealistic for many households today,” cautions Dennis Shirshikov, a professor of economics and finance at City University of New York/Queens College.
Consider that, per a Mortgage Research Center study, fewer than 6% of first-time homebuyers live in a housing market where 28% of the median household income could cover a house payment. Only about one-third (846) of U.S. counties are affordable based on the 28% rule, and merely 6% of the U.S. population lives in these counties; two-thirds of Americans live in an area where the payment on their first home would use more than 40% of the county’s median income.
“If you are entirely debt-free, a mortgage lender might approve a housing DTI closer to 36% versus 28%, but lenders generally prefer some buffer for future debts or emergencies,” Shirshikov adds. “Spending too much on housing could leave you vulnerable to unexpected expenses if your income changes.”
The 25% Post-Tax Rule
Another popular metric many follow is the 25% post-tax rule, which requires that no more than one-quarter of your take-home pay should go toward housing.
“If you bring home $4,000 per month after taxes, your housing costs in this example should be under $1,000, using the 25% post-tax rule. You can calculate this by reviewing your paystub to see your net income after deductions like taxes and retirement contributions,” Holman notes.
43% DTI Is Still Accepted by Lenders
Lenders will look closely at your back-end DTI number to help determine if you are eligible for a mortgage loan. Here, the second number in the 28/36 rule applies. Lenders usually prefer that your back-end DTI not exceed 36%, but many will allow that number to go up as high as 43%.
“This 43% rule is the maximum DTI many lenders will allow for a qualified mortgage. It ensures you won’t overextend yourself financially,” explains personal finance expert Andrew Lokenauth.
The FHA loan, due to strong government backing meant to bolster U.S. homeownership, offers significantly higher DTI maximums.
Loan program | Maximum back-end DTI usually allowed |
Conventional mortgage loan | 43% |
FHA mortgage loan | 50% (with compensating factors like a strong credit score or significant savings) |
VA mortgage loan | 41% |
USDA mortgage loan | 41% |
Other Factors that Impact Affordability
Several different components factor into what you can afford and the ability to qualify for a mortgage loan. Here’s a rundown of each.
Income and Employment Stability
Mortgage lenders want assurance that you have job security and good prospects for continued healthy earnings. Your job history and income history will demonstrate this.
“Lenders want proof of steady income – usually two years of employment at least – to ensure you can make your loan payments,” Lokenauth adds.
Down Payment
The amount of money you can afford to put down on a home will impact your ability to qualify for a loan.
“A larger down payment reduces your loan amount and monthly payment, making you more creditworthy in the eyes of the lender,” says Shirshikov.
The minimum down payment required will vary by loan program:
Conventional loans: as low as 3% for qualified first-time buyers using the HomeReady or Home Possible program.
FHA loans: 3.5% down if you have a credit score of 580 or higher, and at least 10% down with a credit score of 500 to 579.
USDA & VA loans: No down payment is required.
Credit Score
Your three-digit FICO credit score can also have a huge effect on loan approval and can even position you to earn a lower interest rate on your mortgage loan – which can affect affordability.
“A higher credit score can yield better interest rates, which lowers your costs over time and can save thousands otherwise spent on interest,” Lokenauth points out.
Interest Rates
The interest rate you are quoted by the lender will play a huge role in what you can afford, substantially affecting your monthly mortgage payment.
“Even a small rate difference can have an impact on your monthly payment,” says Shirshikov.
For instance, imagine you need to borrow $300,000 to buy a home. That loan at a fixed rate of 7% would cost you $1,996 monthly (in principal and interest). But if you got the same loan for only 6%, your monthly payments would drop by nearly $200 (all figures for example purposes only).
Let’s say you needed to borrow more: $450,000. At a 7% fixed interest rate, your monthly payment would be about $2,994; but it would drop to $2,698 if you locked in at 6% instead.
Property Taxes, HOA Fees, PMI, and Home Insurance
Other factors that influence what you’ll ultimately pay for a mortgage include property taxes, private mortgage insurance (PMI, which may be required if you make a down payment of less than 20%), homeowners insurance, and, if applicable, HOA fees. It’s important not to forget these expenses, which can add up quickly, when doing calculations to determine affordability. If you use an online calculator to project your monthly mortgage payment, be sure it factors in all these added costs and allows you to customize things to your liking and individual market.
Loan Term
The length of your loan can also affect how much it will cost you. A shorter loan term – such as choosing 15 years versus 30 years – can save thousands otherwise spent on interest, but will likely increase your monthly mortgage payment significantly. A longer term will probably do the opposite.
The good news is that if you choose a typical 30-year term, you can always opt to make accelerated payments applied toward your principal at any time during your term (if allowed by the lender, which most do), which can shorten your term and save big dollars on interest.
Type of Mortgage
Your mortgage type can affect affordability. If you are an active duty military member or veteran, for instance, you may qualify for a VA loan, which requires no money down without having to pay for mortgage insurance, and you could be quoted a lower interest rate as well.
Or, if you opt for an FHA loan instead of a conventional loan, you may have to only save for a 3.5% down payment – although you will be required to pay mortgage insurance, possibly for the life of the loan.
“Also, consider the differences between a fixed-rate mortgage loan and an adjustable-rate loan. The former offers stability and predictable payments, while the latter may charge less in the early years before fluctuating up or down unpredictably,” says Lokenauth.
How to Lower Monthly Mortgage Payments
To save money and pay less on your monthly mortgage, follow these tips:
1. Improve your credit score by paying your bills on time and in full, not opening any new accounts or closing existing accounts, and checking your credit reports for errors.
“Increasing your credit score from, for example, 680 to 740 could lower your interest rate by 0.5%, saving you hundreds annually."
2. Choose a longer loan term, such as a 30-year loan versus a 15- or 20-year loan.
3. Save up to make a larger down payment, which decreases the amount you need to borrow.
4. Eliminate private mortgage insurance. This can be done by paying down your principal and ensuring that you have 20% equity in your property (reducing your loan-to-value ratio below 80%), resulting in significant monthly savings.
5. Refinance at a later date, if possible, to lower your interest rate and/or change your loan term.
Determining What You Can Afford
Remember: Many different costs go into homeownership besides your monthly mortgage payment, including maintenance, repairs, and upgrades. Think carefully about all of these related costs before shopping for a mortgage and committing to a loan.
“Repairs and maintenance can add up over time, so it’s important to set aside 1% to 3% of your home’s value annually as a good rule of thumb to cover these expenses,” recommends Holman.
Don’t overlook unanticipated bills, either.
“Unexpected expenses like landscaping, emergency fixes required, and the costs to heat and cool your home can add up quickly, so always budget for the unknown,” Lokenauth suggests.
