What Percent of Income Should Go to Mortgage?

Updated: August 31, 2023

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Owning a home is a quintessential part of the American Dream. However, the financial commitment associated with homeownership is substantial, so it's important to navigate this journey wisely to avoid financial strain. One of the most crucial decisions you'll make as a potential homeowner is deciding how much of your income should go to your mortgage.

Determining the ideal percentage isn't as straightforward as it might seem. The financial rules of thumb you've heard about don't always apply to every homeowner. How much of your income should go to your monthly payments will depend on many factors, including your income, debts, monthly expenses and personal financial goals.

What Percent of Income Should Go to Mortgage?

Determining how much of your income should go toward your mortgage can seem daunting, but several widely used models can guide you, such as the 28/36 rule, the 25% rule, the home affordability rule of 2.5 and the rent vs. buy calculation.

The 28/36 Rule

The 28/36 rule helps guide mortgage and debt affordability. It provides clear ratios to help homeowners make informed decisions about their financial commitments.

This rule suggests two key ratios for managing your finances:

  • Front-end ratio (28%): This suggests that no more than 28% of your gross monthly income (your total income before taxes and other deductions) should go toward housing expenses. This encompasses your mortgage payment, which includes principal and interest, as well as additional costs such as property taxes and homeowners insurance. These are often escrowed or included in your monthly mortgage payment. In this bracket, you should also consider other potential costs, such as Homeowners Association (HOA) fees or maintenance costs.

  • Back-end ratio (36%): This suggests that no more than 36% of your gross monthly income should be allocated to total debt service. This bracket includes your mortgage and other debts such as car loans, student loans, credit card payments and personal loans.

The 25% Rule

The 25% rule suggests that your monthly mortgage payment should not exceed 25% of your take-home (net) income. This income refers to the amount you receive after taxes and other deductions rather than your gross income, which is your income before any deductions.

For example, if your monthly take-home pay is $4,000, the 25% rule suggests that your mortgage payment should not exceed $1,000. The primary benefit of this rule is that it leaves room in your budget for other important financial goals and unexpected expenses.

Home Affordability Rule of 2.5

The rule of 2.5 suggests that the maximum home price you should consider is approximately 2.5 times your annual gross income. For instance, if your yearly income is $100,000, this rule suggests that you should consider homes priced up to $250,000.

This guideline provides a straightforward starting point in your home search by helping you gauge the affordable house price range based on your income. It also helps guard against overextending your finances by purchasing a home that is too expensive and could strain your budget.

Rent vs. Buy Calculation

The rent vs. buy calculation is a comparative analysis that takes into account various costs associated with renting or buying a home. It provides an overall picture of which option might be more cost-effective for you over a specified period.

Some key factors to consider include:

  • Renting costs: This includes not only the monthly rent but also renters insurance and any increases in rent over time.

  • Home-buying costs: Home-buying costs include mortgage payments (principal and interest), property taxes, homeowners insurance, closing costs, potential home price appreciation and any maintenance or renovation expenses.

  • Time horizon: How long you plan to stay in the home is a crucial factor. The longer you stay in a purchased home, the more you can spread out the upfront costs of buying, potentially making buying more favorable than renting.

Factors To Consider When Determining the Percent of Income Going to Mortgage

As you decide what portion of your income should go toward your mortgage, you'll need to consider several factors, including your income stability, debt load, future plans and more.

Debt load: Your existing debt can significantly impact how much you can comfortably allocate toward a mortgage. High levels of student loan debt, auto loans, credit card debt or other personal loans can limit your mortgage affordability.

Income stability: The stability of your income plays a significant role in determining how much of it should go toward your mortgage. A steady, reliable income can comfortably support a higher mortgage payment than an irregular or variable income.

Savings and emergency funds: Before deciding on a mortgage payment, consider the state of your savings. It's advisable to have an emergency fund that covers three to six months of living expenses. This can provide a safety net in case of job loss, unexpected medical expenses or other financial emergencies. It can also help you avoid dipping into your home equity, which can be expensive and risky.

Lifestyle and personal goals: Your personal and financial goals significantly influence how much you can comfortably spend on a mortgage. For instance, if you value travel and dining out or have a costly hobby, you might allocate less of your income toward housing.

Future plans: Your future plans can also impact your decision. If you plan to have children, go back to school or retire early, these factors can dramatically change your income and expenses. Although you can't predict everything, incorporating foreseeable changes can help you create a more realistic and sustainable budget.

Local cost of living: The cost of living in your area impacts housing prices and other significant budget items like groceries, transportation, healthcare and utilities. If you live in a high-cost area, you may need to allocate more of your income to housing.

It's best to consult with a financial advisor to make an informed and comfortable decision about how much of your income should go toward your mortgage. Your home should be a place of comfort, not a source of financial stress.

How Lenders Determine How Much You Can Afford

When you apply for a mortgage, lenders don't simply accept your word for how much house you can afford — they have their own methods for determining your home affordability. Understanding the factors affecting their decision can help you prepare for a successful mortgage application.

  • Credit score and credit history: Your credit score and history are key indicators of your creditworthiness and repayment habits. Lenders use them to assess the risk associated with lending to you. A higher credit score indicates a lower credit risk, meaning lenders might be more willing to offer you a larger mortgage or better terms.

  • Debt-to-income ratio: Lenders consider your debt-to-income (DTI) ratio to understand how much of your income is already committed to other debt obligations. They tend to prefer lower DTI ratios as they suggest you have a good balance between income and debt.

  • Loan-to-value ratio: The loan-to-value ratio is the loan amount compared to the property's value. A lower LTV ratio typically signifies less risk for the lender as it means you have more equity in the home.

  • Employment history and income stability: Lenders prefer borrowers with a stable employment history and a steady income as they're more likely to make continuous mortgage payments. Lenders may see this as a risk factor if you have frequent job changes or inconsistent income.

  • Down payment: The size of your down payment can significantly influence how much home you can afford. A larger down payment reduces the loan amount and can potentially lower your interest rate, making the mortgage more affordable.

How To Lower Your Mortgage Payments

Homeownership comes with significant financial responsibilities; for many homeowners, the mortgage payment is their largest monthly expense. Here are some ways to reduce your monthly mortgage payments:

Refinance your mortgage

Mortgage refinancing can be a viable option to lower your monthly payments, especially in a low-interest-rate environment. When you refinance, you replace your existing loan with a new one, which ideally has a lower interest rate. However, there are costs associated with refinancing, so you'll need to ensure the amount you save on monthly payments outweighs the refinance costs.

Extend your repayment term

Another way to lower your monthly mortgage payment is to extend your loan term, say from a 15-year to a 30-year mortgage. While this can reduce your monthly payments, keep in mind that it will increase the total interest paid over the life of the loan.

Make a larger down payment

If you're still in the home-buying process, making a larger down payment can reduce your monthly payments by decreasing the loan amount. Plus, if your down payment is 20% or more, you can avoid private mortgage insurance (PMI), further reducing your monthly costs.

Get rid of your PMI

If you put less than 20% down on your home, you're likely paying PMI. Once you have 20% equity in your home, you can have your PMI canceled, which will lower your monthly payment.

Appeal your property taxes

If your home's assessed value is more than what you believe it's worth, you could consider appealing your property tax assessment. Lowering your property taxes can reduce the portion of your mortgage payment that goes into escrow for taxes.

Lowering your monthly mortgage payments can provide breathing room in your budget and help you achieve other financial goals. Always consider your overall financial situation and long-term objectives to ensure your chosen strategy aligns with your unique needs and goals.

Frequently Asked Questions

As with any financial decision, determining how much of your income should go to your mortgage requires serious consideration. We compiled a list of frequently asked questions to help provide additional information.

What happens if more than 30% of your income goes toward a mortgage?
If you have other significant debts, should you still aim for 28% of your income to go to housing?
Are there any exceptions to mortgage-to-income rules?
Can you count potential future income toward the percentage of income for your mortgage?
How often should you review your mortgage in relation to your income?

About Christopher Boston

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Christopher (Croix) Boston was the Head of Loans content at MoneyGeek, with over five years of experience researching higher education, mortgage and personal loans.

Boston has a bachelor's degree from the Seattle Pacific University. They pride themselves in using their skills and experience to create quality content that helps people save and spend efficiently.