Key takeaways
- The traditional rule of thumb is that no more than 28% of your monthly gross income or 25% of your net income should go to your mortgage payment.
- The current combination of elevated interest rates, appreciating home prices and low housing inventory means that new homebuyers may have to devote substantially more to their monthly payments, however — as much as one-third of their income.
- To get a mortgage, borrowers also need to consider their regular, ongoing debts: Most lenders allow a debt-to-income ratio of up to 43%, but prefer 36% — meaning your monthly obligations should be around one-third of your gross income.
When you buy a home, it’s important to know how much of your income you can reasonably dedicate to your monthly mortgage payment. Figuring this out can mean the difference between living comfortably while maintaining other financial priorities and being “house poor” — struggling to make ends meet month after month.
So, what percent of income should go to mortgage payments? There are a few different rules you can apply here, so let’s dig in.
What percent of your income should go to your mortgage?
Every borrower’s situation is different, but there are a few schools of thought on what percent of income should go to mortgage payments — plus some guidelines of how much of your take-home pay for a mortgage is appropriate.
28% rule
When you’re calculating the percentage of income for mortgage payments, you might want to apply the 28 percent rule. It’s the threshold many lenders adhere to, explains Corey Winograd, loan officer and managing director of East Coast Capital, which has offices in 14 states.
“Most lenders follow the guideline that a borrower’s housing payment (including principal, interest, taxes and insurance) should not be higher than 28 percent of their pre-tax monthly gross income,” says Winograd. “Historically, borrowers who are within the 28 percent threshold generally have been able to comfortably make their monthly housing payments.”
This 28 percent cap centers on what’s known as the front-end ratio, or the borrower’s total housing costs compared to their income.
36% rule
The 36 percent model is another way to determine how much of your gross income should go towards your mortgage, and can be used in conjunction with the 28 percent rule. This is less about the mortgage-percent of income breakdown and more about your income and your overall debt.
With this method, no more than 36 percent of your gross monthly income should be allocated to all of your debt, including your mortgage and other obligations like a student or car loan and credit card payments. This percentage uses the back-end ratio or your debt-to-income (DTI) ratio.
“Most responsible lenders follow a 36 percent back-end DTI ratio model, unless there are compensating factors,” Winograd says.
Note that there are maximum DTI ratios set by government-sponsored entities Fannie Mae and Freddie Mac, along with the Federal Housing Authority (FHA), that lenders use in underwriting, as well. For conventional loans, the maximum can range from 43 percent to 45 percent (and sometimes higher), assuming you can meet other eligibility criteria around your credit score, cash reserves and other financial factors. For FHA loans, it’s generally 43 percent, but also can go higher.
Based on the 28 percent and 36 percent models, you can calculate how much of your monthly income should go to mortgage payments. Here’s a budgeting example, assuming the borrower has a monthly income of $5,000.
- $5,000 x 0.28 (28%) = $1,400 (maximum mortgage payment)
- $5,000 x 0.36 (36%) = $1,800 (maximum debt obligation including mortgage payment)
Going by the 28 percent rule, the borrower should be able to reasonably afford a $1,400 mortgage payment. However, factoring in the 36 percent rule, the borrower would also only have room to devote $400 to their remaining debt obligations. Applied to your own financial situation, this may or may not be feasible for you.
43% DTI ratio
While mortgage lenders prefer your DTI ratio not exceed 36 percent, in many cases, lenders can accept a maximum of 43 percent — this is still within the range of what’s known as a “qualifying mortgage” (the sort that Fannie Mae and Freddie Mac will back and purchase from a lender). That upper limit might even go higher depending on the lender and your other qualifying factors.
Overall, though, the lower your DTI ratio, the higher your chances of getting approved for a mortgage, since too much debt can heighten the risk of default. The Consumer Financial Protection Bureau reports that borrowers with higher DTI ratios are much more likely to have difficulty keeping up with monthly mortgage payments.
25% post-tax model
So much for gross income-based estimates. But how much of your net income — that is, your take-home pay — should go towards mortgage payments? Here, you can use the 25 percent post-tax model. This is another way to consider your debt load and what you can afford.
With this model, no more than 25 percent of your after-tax income goes toward your monthly mortgage payments. For example, if your monthly take-home pay (after taxes) is $4,000, that means up to $1,000 can be spent on your mortgage payment.
This net income model might be more viable to go by if something is notably affecting your take-home pay, like wage garnishment or aggressive retirement savings. It’s also ideal if you want a real daily sense of your cash flow.
Mortgage payments, income and today’s housing market
As we mentioned, these lending standards are traditional rules of thumb. But these are far from traditional times in the U.S. housing market.
Prospective homebuyers are facing a perfect storm of elevated interest rates, appreciating home prices and low housing inventory. As a result, the average monthly mortgage payment hit a record high of $2,016 in the final quarter of 2023. That’s eaten a lot into the percentage of household income needed to meet it. While current homeowners, who’ve locked in lower mortgage rates (around 3 to 4 percent), need just 21 percent of their median household income to make the average monthly mortgage payment, those looking to borrow at today’s rates will find payments will consume 12 percentage points more of their income, according to real estate and mortgage data analyst ICE Mortgage Technology.
33.4%
The percentage of a prospective homebuyer’s median household income needed to make the average mortgage payment (principal and interest), as of February 2024
Source: ICE Mortgage Technology
The fourth-quarter 2023 U.S. Home Affordability Report by AATOM, another real estate data analysis firm, found the portion of average local wages consumed by major expenses on median-priced, single-family homes was deemed unaffordable in over 75 percent of the 580 counties analyzed.
“Even though there are signs of better times for buyers this quarter, the high expense-to-wage ratio is still a stretch in most of the country for average workers who don’t have a lot of other financial resources like significant savings or investments,” noted ATTOM CEO Rob Barber, in a statement accompanying the survey. “While lenders will often push the 28 percent rule, especially if buyers have lots of financial resources outside of wages, we now are seeing fully three-quarters of markets around the country pushing the basic lending benchmark.”
How do lenders determine my mortgage payment?
We’ve laid out some general rules, but lenders have their own ways of deciding what percentage of income for mortgage payments is appropriate. These are the major factors mortgage lenders weigh to determine how much mortgage a borrower can reasonably afford:
- Gross income – Your gross income is your total earnings before taxes and other deductions are factored in. Other sources of income, such as spousal support, a pension or rental income, are also included in gross income.
- DTI ratio – Your DTI ratio is your total monthly debt obligations divided by your total gross income.
- Credit score – Your credit score is a major factor lenders look at when evaluating how much you can afford. In general, the higher your credit score, the lower your interest rate, which impacts how much you can feasibly spend on a home.
- Work history – Lenders look for a stable source of income to ensure you can repay your mortgage. When you apply for a loan, you’ll be asked to provide evidence of employment (such as a pay stub) from at least the past two years. If you work for yourself, you’ll be asked to provide tax returns and other business records.
How to lower your monthly mortgage payments
If you’re ready to buy a house but you think your mortgage-percent of income breakdown could get in the way, you have options. To work toward a lower monthly payment, you can:
- Get a longer mortgage term – If you pay off your loan in 30 years rather than 15, it breaks the monthly amounts into smaller sums.
- Work on your credit score – A better credit score means scoring a lower interest rate. And even a little downward movement there can go a long way toward lowering your monthly payments. You can use our calculator to see for yourself.
- Save up for a bigger down payment – The more money you put down, the less you’ll need to borrow for your mortgage. Plus, saving up for a down payment of at least 20 percent eliminates the need for private mortgage insurance, which lenders consider as part of that monthly mortgage sum.
Other considerations for what you can afford
Costs of homeownership
Figuring out how much of your monthly income should go to a mortgage is a big piece of the affordability puzzle, but don’t stop there. As any homeowner can attest, the expenses of owning and maintaining a home can add up well beyond the monthly cost of a mortgage.“HOA fees, utility payments and other expenses must be factored into the affordability calculation,” Winograd says.
Other homeownership costs can include:
- Home maintenance, including a fund for emergencies or future replacement of things that wear out over time such as appliances, the roof and HVAC system
- Pest prevention
- Security systems
Mortgage type
The kind of mortgage you choose can also have a significant impact on how much home you can afford. To find a loan that’s right for you, it’s important to explore all your options, including conventional, FHA and VA loans. It’s also smart to find a mortgage lender that understands your financial situation, needs and goals.
“An effective loan officer will spend the time to learn about a client’s current and future financial picture to determine a suitable loan product, loan amount and loan terms,” Winograd says.
Ultimately, the percentage of your income for mortgage payments is just one portion of finding the right home loan for you.
The bottom line
You can work with your lender to do the affordability calculations based on your income and the cost of the home you have in mind, and from there, evaluate whether you can reasonably afford it. Remember that when it comes to estimating what you can afford, there are guidelines you can follow, but ultimately it’ll be based on your individual circ*mstances.
“There is no hard and fast rule because every borrower has a different story, a unique credit profile and varying debt obligations, all of which must inform the decision regarding the percentage of gross monthly income available for a housing payment,” Winograd says.
Additional reporting by Allison Martin
