What Percentage Of Your Income Should Be For Your Mortgage?

Before you dive into your home search, it's crucial to know what you can afford. This helps you save time and prevents you from getting attached to homes that are beyond your budget. A helpful rule of thumb is calculating how much of your income should be allocated to your monthly mortgage payment.

Keep reading to learn a few straightforward methods for estimating the right percentage of your income for your mortgage payment.

What Percentage Of Your Income Should Be For Your Mortgage? 

There are several different methods you can use to determine a housing budget. Remember that while these guidelines help estimate your home affordability, it's equally important to think about your financial priorities and goals.

The 28% Rule

One approach is to use the 28% rule, which states that your mortgage payment shouldn't be more than 28% of your gross monthly income. This percentage should include your principal, interest, taxes, and insurance premiums.

To estimate how much you can afford using this approach, simply multiply your monthly gross income by 0.28.

The 28% Rule: An Example

Let's say your monthly gross income is $9,000. Applying the 28% rule, you'd multiply $9,000 by 28%, which equals $2,520. That means ideally, you shouldn't spend more than $2,520 on your mortgage each month. This includes all property taxes, homeowners insurance and mortgage insurance.

The 28/36 Rule

The 28/36 rule helps you keep your debts manageable. It suggests that your mortgage payment should not exceed 28% of your pretax monthly income. Additionally, all your monthly debts, including housing costs, should stay under 36% of your gross income.

The 28/36 Rule: An Example

If your total monthly household income before taxes is $10,000, you can budget up to $2,800 (10,000 X 0.28) for your mortgage payment. Your other debts should stay at or under $800 each month. This means your total monthly debts shouldn't surpass $3,600 (10,000 X 0.36).

The 35/45 Rule

With the 35/45 rule, ideally, your debts shouldn't exceed 35% of your income before taxes or 45% after taxes. This method is usually beneficial if you have fewer monthly expenses and feel confident allocating a bigger chunk of your income to housing payments.

To determine how much you can set aside toward housing with this model, start by calculating 35% of your gross income (before taxes) and 45% of your net income (after taxes). The range between these two figures represents your affordable housing payments.

The 35/45 Rule: An Example

Let's break it down with an example: If you earn $9,000 before taxes and $7,500 after taxes, here's what you can afford. Start by multiplying $9,000 by 0.35 to get $3,150, and multiply $7,500 by 0.45 to get $3,375. So, your comfortable range for all monthly spending will fall between $3,150 and $3,375.

The 25% Rule

Another way to determine what percentages of your income should go to your mortgage is to ensure your monthly debt is 25% or less of what you earn after taxes. This approach encourages you to be cautious with your spending compared to other ways of figuring out how much mortgage you can afford. It's about keeping your debt manageable in relation to what you bring home after taxes, which can help you stay financially stable over time.

The 25% Rule: An Example

Let's say you bring home $7,500 after taxes. You'd multiply that by 0.25 to find out you can afford up to $1,875 per month for your total mortgage payment using this method.

How Lenders Determine What You Can Afford

Creating a budget helps you figure out what you can afford. It's also important to know what lenders consider when calculating how much home you can realistically afford. Here are some factors lenders look at.

Gross Income

Your gross income is everything you earn before taxes and deductions, including wages, salaries, interest, and other earnings. It doesn't factor in taxes or deductions. When lenders calculate how much you can afford for a monthly payment, they consider your gross income.

Debt-To-Income Ratio 

While your gross income is crucial in determining what you can afford, your debt-to-income (DTI) ratio also plays a big role. Your DTI ratio compares your earnings to how much debt you owe. Lenders use both your DTI ratio and gross income to figure out your monthly mortgage budget.

To find your DTI ratio, add up all your monthly debts — like credit card bills and loan payments — divide that total by your gross monthly income, and then multiply by 100. If your DTI ratio is high, it might make it harder to qualify for a loan because your debts could affect your ability to pay your mortgage. On the other hand, the good news is that a lower DTI ratio can make it easier to get a mortgage.

Lenders usually want your housing costs plus other debt-to-income ratio to be no more than 36% of your monthly gross income. For example, if your monthly gross income is $10,000, your mortgage payment plus your other long-term debts should add up to at most $3,600 monthly. There are many exceptions to this, though, so please verify your specific qualifying DTI when you are ready for a mortgage.

Credit Score 

Your credit score significantly impacts whether or not lenders will approve your loan application. Lenders check your score from all three major credit bureaus and usually use the middle or average score to decide if you qualify for a home loan. A higher score, especially if you also have a higher DTI, increases your chances of approval.

Different loans have different credit score requirements. Conventional loans, for example, typically require a minimum credit score of 620, but some mortgages might allow scores as low as 500.

Remember that having a very good to excellent credit score, usually 740 or higher, can help you get the best mortgage terms, costs and lowest interest rates.

How To Lower Your Monthly Mortgage Payment 

Here are some strategies you can use to make your monthly mortgage payment more affordable.

• Boost your credit score. Having a higher credit score can improve your chances of qualifying for a lower interest rate. It's possible to boost your score by doing things like consistently paying bills on time, reducing debt, and keeping balances low on all your credit accounts.
• Make a larger down payment. Putting more money down toward your home purchase can reduce your monthly mortgage payments because you'll need to borrow less. It could also mean you won't have to pay private mortgage insurance(PMI). Lenders may require it if your down payment is less than 20% for a conventional home loan.
• Choose a longer mortgage term. If you choose a longer mortgage term, your monthly payments will be lower because you spread them out over more time. While this means paying more interest in the long run, it can also lower your DTI ratio.
• Refinance your mortgage. If you currently have a mortgage and interest rates have decreased, refinancing for a lower interest rate could mean paying less each month. Before applying for a refinance, ensure your credit is in good shape.
• Ask for a home tax review. If you own a home or are in escrow, consider requesting a reassessment from your county. This could lower your property taxes and reduce your monthly mortgage payment.
• Wait until your finances improve. Delaying your home purchase might be challenging but can pay off in the long run. Taking the time to improve your finances — like boosting your income or paying down debts — could qualify you for a larger loan and make saving for a bigger down payment easier, ultimately strengthening your mortgage application.
• Pay down debt. Paying off your existing debts can help you afford a more expensive home by strengthening your mortgage application and potentially getting you a better interest rate. Focus on paying more than the minimum or targeting the most significant debt first to improve your financial health and credit score.

Other Homeownership Costs To Consider 

Besides what you pay upfront for your home, owning it comes with extra expenses. A good rule is to set aside about 1% of your home's value each year for these costs. For example, if your home is worth $400,000, try to budget around $4,000 annually for other homeownership expenses.

Here are some additional costs to account for:

• Routine maintenance
• Emergency repairs
• Security system
• Homeowners association (HOA) fees
• Lawn service
• Pest control
• Utilities
• Cleaning and housekeeping
• Renovations and home improvements

FAQs About The Percentage Of Income For Your Mortgage 

Let's explore some common questions about the percentage of income you should budget for your mortgage.

Is the 28/36 rule realistic? 

The 28/36 rule is a handy guideline for keeping your mortgage and debts manageable, but it's important to remember that everyone's situation is unique, so take into account your finances and what feels right for you.

How much house can I afford with a $100K salary? 

When using the 28/36 rule, you should try to spend no more than 28% of your gross income on your mortgage. With a $100,000 annual salary, your maximum monthly mortgage payment should be around $2,333. However, the actual home amount you can afford will depend on your overall expenses and personal comfort level.

Is 50% of take-home pay too much for a mortgage? 

Paying 50% of your take-home pay on a mortgage is often seen as too high. In general, keeping your housing costs, including your mortgage, below 28% of your gross income is recommended. However, the right amount depends on your needs and financial goals.

The Bottom Line 

Ultimately, how much of your income should go towards your mortgage depends on your personal situation and finances. To estimate the mortgage you might qualify for, it's helpful to look at preapproval amounts and consider the 28/36 rule. But crunching the numbers and creating a realistic budget before committing to homeownership is crucial.

If you skip this step, you might end up buying a home that stretches your finances too thin. After purchasing, managing a tight budget could make owning a home challenging.

Before you start house hunting, figure out how much you're comfortable spending. Once you have a clear budget, you can begin your mortgage application online with Rocket Mortgage®.