What Percentage of Your Income Should Go Toward a Mortgage?

By: Craig Berry Reviewed By: Paul Centopani
July 12, 2023 - 7 min read

Budgeting for your mortgage

Whether you’re preparing to buy your first home or considering a move up to your forever home, understanding how mortgage approval works is essential.

When you apply for a mortgage, lenders consider many factors before your loan can be approved. One such factor is the percentage of your monthly income that can be used for your mortgage.

Continue reading to learn more about debt ratio calculations, housing costs, and what percentage of your income can be used towards your mortgage payment.

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How much of your income should go to your mortgage payment?

Regardless of lender guidelines, the percentage of your income that should go towards your mortgage payment is the amount which you can comfortably afford. Once you’ve determined the amount you’re comfortable paying, you’ll want to make sure your numbers are aligned with your lender’s numbers.

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One of the most important qualifying criteria that lenders use is known as your debt-to-income ratio, or DTI. Your DTI measures your affordability by dividing your housing expenses by your gross monthly income.

Debt ratios fall into two categories: front-end ratio and back-end ratio.

Your front-end ratio is used to describe your monthly housing payment divided by your monthly income. To calculate your front-end ratio, simply divide your total housing expense by your gross monthly income.

The components lenders consider as part of your mortgage payment are more than just your principal and interest payment. There are other elements that make up your total housing expense.

Your lender will take all of the following expenses, as applicable, into consideration when calculating your front-end debt ratio.

  • Principal: the amount of money you borrowed when you bought your home, paid off throughout the life of your loan.
  • Interest: the fee you pay to borrow the money for your home loan, typically expressed as an annual percentage rate (APR).
  • Taxes: property taxes, assessed by the local government, are typically based on the assessed value of your home.
  • Homeowners insurance: homeowners insurance, also known as hazard insurance, is required by most lenders and protects your home and personal property in the event of damage or theft.
  • Mortgage insurance: private mortgage insurance is required on all conventional loans when you make a down payment under 20%. Mortgage insurance is required on all FHA loans.
  • Association fees: in order to maintain common areas, remove trash and snow, and help enforce community rules, many neighborhoods and most condominiums have a homeowner’s association fee.

Your back-end ratio refers to the amounts you’ll pay towards housing, as well as payments made on credit cards, auto loans, personal loans, alimony, etc. Lenders use your back-end ratio in conjunction with your front-end ratio to determine how much you can afford to borrow.

Common rules for percentage of income

Each lender has their own set of requirements when determining how much income can be used when getting approved for a mortgage. Typically, lenders follow debt ratio guidelines as a general rule for determining your eligibility.

Every mortgage borrower’s situation is different. Some have excellent credit, but perhaps low income. Others may have a large amount in savings, but their credit scores aren’t great. Lenders use these variables when determining a mortgage borrower’s eligibility.

Three models are commonly used by lenders to calculate the percentage of income that should be spent on your monthly mortgage payment.

The 28/36 rule

The 28/36 rule is used by lenders to determine how much house you can afford to buy. Using this rule, your maximum household expenses cannot exceed 28 percent of your gross monthly income. Thirty-six means your total household expenses, combined with your other monthly debts, can’t exceed more than 36 percent of your gross monthly income.

The 35/45 rule

The 35/45 rule is another rule that factors in your gross monthly income, yet it also takes your post-tax income into consideration. This model suggests that your total monthly debts, including your total housing expenses, shouldn’t exceed 35 percent of your pre-tax, gross income, or 45 percent of your post-tax income.

The 25% rule

The 25 percent model is yet another way to consider your debt load and what you can comfortably afford. Some would-be homebuyers prefer using this method, as it is a straightforward calculation based on the net number on your paycheck stubs, also known as your take-home pay. Following the 25% post-tax rule means no more than 25% of your post-tax income should go towards housing expenses.

What lenders look at to determine your home affordability

Debt ratios are just one of the factors that your lender uses to determine how much home you can afford. Other affordability factors that lenders use include:

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  • Income: Lenders will look at your gross monthly income to determine how much you can borrow. Your income is one of the most important ways for lenders to determine how much home you can afford.
  • Debt ratio: The amount you pay each month on your outstanding debts plays a major role in determining mortgage borrower eligibility. Expenses, such as fuel, utilities and food are already factored into the equation with the debt ratio rules.
  • Credit score: Your lender will review your credit score and payment history to assess credit worthiness. Mortgage borrowers with higher credit scores pose less risk than those with poor credit.
  • Employment history: Your work history will be evaluated to ensure you have stable employment and income. Generally, a lengthier job history makes for a stronger mortgage applicant.

After reviewing these factors, it’s possible that your lender may request more documentation. Although not required on every mortgage, additional items such as full tax returns and written letters of employment verification may be required.

How to lower your monthly payments

Even though your lender may approve you for a certain amount, the monthly payments may be more than you’re comfortable paying. Fortunately, there are ways you can lower your monthly payments.

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Raise your credit score

Interest rates are based largely on your credit scores. Lower credit scores mean higher interest rates. A higher rate results in a higher monthly payment. Having a 620 score vs a 780 score can mean significant differences in your monthly payments, as well as the cost you may have to pay for your rate. Your lender should be able to help you with ways to boost your credit score.

Make a larger down payment

Larger down payments mean a lower loan amount. The less money borrowed, the lower your monthly payment. While a 20% down payment is rarely a requirement, it would be the difference in whether you have to pay for mortgage insurance on a conventional loan. Ask your lender for options that include what your payments would be based on different down payments.

Shop for a competitive mortgage rate

The interest rate on your mortgage affects your monthly mortgage payment more than anything else. Even a quarter of a percentage point difference can add up. For example, someone with a 5.75% rate on a loan amount of $350,000 will have pay almost $55 less per month than someone with the same loan amount but with a 6% rate. Shopping around and getting multiple rate quotes could end up saving you thousands over the lifetime of your mortgage.

Go with a lower priced home

As mentioned, a lower loan amount means a lower monthly payment. If you can’t make a larger down payment, another way to reduce your loan amount is by choosing a lower priced home. Assuming a rate of 5.5%, the difference between a loan amount of $325,000 and $300,000 is a lower payment of roughly $141 per month

Other home buying costs to consider

Owning a home costs more than just what you’ll spend on the mortgage payment each month. It’s important not to overlook the additional expenses you’ll have. Not only are there upfront costs to consider, there are ongoing expenses that come with being a homeowner.

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When you buy a home, it may need certain repairs or improvements. Some home renovations can be costly. Will you be paying cash or financing the improvements? These are important considerations.

Even if you’re not making major repairs or renovations, all homes require ongoing maintenance. Whether it’s lawn care, a new appliance, pest control or HVAC repairs, be mindful of all of the costs of homeownership.

The bottom line

Whether you’re a first-time homebuyer or a veteran homeowner, it’s important to consider all of the monthly costs, not just your mortgage payment. Work closely with your lender to do affordability calculations prior to placing any offers.

By understanding all of the variables, including what percentage of your income can go towards your mortgage payment, you’ll be able to determine the amount of home you can comfortably afford.

If you’re ready, reach out to a lender to begin your home buying journey.

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FAQ — Percentage of income for your mortgage

What is the 28/36 rule?

The 28/36 rule, also known as your front-end and back-end ratios, states that your total housing costs should not exceed 28% of your gross monthly income and your total debt payments should not exceed 36%. This rule is meant to keep mortgage borrowers from overstretching their budget for housing and other costs.

What is an example of the 28/36 rule?

To calculate the 28/36 rule, you need to know three figures: gross monthly income, total monthly housing expense, and all other monthly debts reporting on your credit report. If your gross monthly income is $5000 per month, you’d multiply $5000 x 28 percent, as well as 36 percent. That means your total allowable housing expense would be $1400. You would then be able to have additional monthly expenses (i.e., auto payment, credit card payment, etc.) of up to a total of $1800 (36% of your monthly income).

Is 40% of income on mortgage too much?

Lenders typically prefer to see front-end debt ratios below 40%. However, there are exceptions to debt ratio rules. Depending on the type of loan, as well as other aspects of your financial profile, such as your credit and your assets, lenders will sometimes make exceptions and approve a debt ratio of 40%.

Do loan officers look at gross or net income?

Most of the time, lenders will use your gross income, or pre-tax income, when calculating your debt ratios. Exceptions to this include income that is non-taxable, such as child support and supplemental security income. With non-taxable income, your gross and net income are typically the same.

Craig Berry
Authored By: Craig Berry
The Mortgage Reports contributor
With over 20 years in mortgage banking, Craig Berry has helped thousands achieve their homeownership goals.
Paul Centopani
Reviewed By: Paul Centopani
The Mortgage Reports Editor
Paul Centopani is a writer and editor who started covering the lending and housing markets in 2018. Previous to joining The Mortgage Reports, he was a reporter for National Mortgage News. Paul grew up in Connecticut, graduated from Binghamton University and now lives in Chicago after a decade in New York and the D.C. area.