What Percentage Of Your Income Should Go To A Mortgage? (2024)

Vault’s Viewpoint

Mortgage payments are made up of principal, interest, insurance and taxes.
Most financial experts recommend spending no more than 28% of your gross monthly income on housing payments.
Your loan term, credit score and down payment can determine your mortgage payment amount.

What Percentage Of Income Should Go To A Mortgage?

Mortgage lenders think about your income in multiple ways: pre-tax (gross) income, post-tax income and even your income that’s left over once you’ve paid your debt obligations each month.

Here are some common income thresholds that lenders use to determine mortgage eligibility.

Pre-Tax Income: 28% Rule

This rule states that no more than 28% of your gross monthly income should go toward housing payments. That means if your pre-tax income is $7,000 per month, your monthly housing costs shouldn’t exceed $1,960. Sticking to the 28% rule usually ensures borrowers can comfortably make their mortgage payments and meet additional financial obligations.

Post-Tax Income: 45% and 25% Rules

The 45% rule considers your post-tax income rather than gross (pre-tax) income. Following this rule means that no more than 45% of your post-tax income should go to your mortgage payment. Running the numbers this way might give you a better idea of your actual cash flow each month, especially if you make large retirement contributions with each paycheck.

For example, let’s say your income is $7,000 before taxes and $5,800 after taxes. Using this rule, your monthly mortgage payment should be less than $2,610.

Though mortgage lenders may allow a loan that eats up 45% of your monthly take-home pay, that may not leave you financially comfortable. Other, more conservative schools of thought suggest that keeping your mortgage below 25% of your post-tax income is a safer strategy.

Debt-to-Income Ratio: 36% Rule

The 36% rule considers the maximum percentage of your gross monthly income that should go toward all debt payments—including your mortgage, student loans, credit card debt, car loans and more. This rule argues that your debt-to-income ratio shouldn’t exceed 36%. In other words, your total debt obligations should not be greater than 36% of your gross income.

What’s Included In a Monthly Mortgage Payment?

Your monthly mortgage payment consists of principal, interest, insurance and taxes. Including all of these costs in one monthly payment streamlines your payments and makes it easier to pay all your bills on time. Let’s look at each factor and how it affects your mortgage payments.

Principal: The principal is the amount you borrowed for your home. You’ll pay down your principal throughout your loan term. The higher your principal, the more you’ll pay in interest.
Interest: The interest is the charge you pay your lender for borrowing the funds, and it appears as a percentage of the amount you borrowed. Your interest rate largely determines how much you’ll pay over the life of the loan. Because interest rates are so high right now, homes have larger mortgage payments than they did several years ago.
Insurance: If you take out a mortgage, your lender will require you to purchase homeowners insurance. This interest protects your lender’s investment if your home is damaged in a fire or natural disaster.
Taxes: You’re also responsible for paying annual property taxes on your home. Your lender will set aside money each month in an escrow account, which will be used to pay your insurance and taxes.
Private mortgage insurance: If your down payment is less than 20%, you’ll have to pay for private mortgage insurance (PMI). This added insurance policy protects your lender if you default on the loan.

How Lenders Determine How Much House You Can Afford

Lenders use a variety of factors to determine how much house you can afford. Here are the four main criteria every lender will assess when evaluating your mortgage application.

Income

Your income can include the money you earn at your job, spousal support, your pension and other money you bring in each month.

However, lenders aren’t just looking at the total amount. They also want to see how consistently you’ve been earning that income. So your lender will also want to see your work history over the past two years.

Credit Score

Your credit score plays a major role in the type of loan you’re approved for. Borrowers with excellent credit are seen as less of a lending risk, so they’ll qualify for the best rates and terms on their mortgage. Qualifying for a low interest rate means you have more money to spend on the home price.

Down Payment

Your down payment also affects the loan you’re approved for. A high down payment indicates that you’re financially stable, so lenders will be more willing to approve you for a larger loan. Plus, making a 20% down payment means you don’t have to pay for PMI (private mortgage insurance), which frees up more room in your monthly budget.

Debt-to-Income Ratio (DTI)

Most homeowners have debt outside of their monthly mortgage payment, like an auto payment, student loans or medical bills. Lenders will look at your DTI ratio to determine whether you can afford to add on a housing payment. As mentioned, keeping that DTI ratio below 36% increases your approval odds.

How to Lower Your Monthly Mortgage Payments

Using a home affordability calculator is a great way to determine how much home you can afford. If you’ve run the numbers and realize you need to cut costs, here are a few ways you can lower your monthly mortgage payments.

Improve Your Credit Score

Your credit score is measured on a range of 300 to 850, and any score above 740 is considered very good. Having an excellent credit score will help you qualify for low interest rates on your mortgage, which will affect your monthly payments.

If your credit score is below 700, spend time improving it before applying for a mortgage. The best way to improve your credit score is by paying your bills on time and reducing your credit utilization rate.

Choose Longer Loan Terms

Another way to reduce your monthly mortgage payment is by extending your loan terms. For example, choosing 30-year loan terms instead of 15-year loan terms can reduce the amount you pay each month. However, that does mean you’ll pay more money in interest over the life of the loan.

Make a Larger Down Payment

Finally, making a larger down payment will reduce your monthly payments because it reduces your overall principal. Suppose you’re buying a $350,000 house and making a $70,000 down payment. That down payment reduces your principal amount to $280,000.

Plus, because you made a 20% down payment, you won’t have to pay for private mortgage insurance. You’ll also probably qualify for lower interest rates, which will reduce the amount you’ll pay monthly and over the life of the loan.

Frequently Asked Questions

Is 50% Of My Income Too Much For a Mortgage?

In most cases, spending 50% of your income on your mortgage payment is probably too high. Most financial experts recommend that you spend no more than 28% of your gross monthly income on your mortgage. If you live in a high-cost area, the absolute most you should spend on your mortgage is 45% of your gross income.

What Is the Maximum Front-End Ratio Allowed?

Some lenders will let you qualify for a mortgage with a front-end ratio of 45%. That means 45% of your gross monthly income is going toward your mortgage payments. So if your monthly income is $7,000, you can spend up to $3,150 on your housing payments. This isn’t ideal but may be necessary for borrowers who live in high-cost areas.

What Is the 50/30/20 Rule?

The 50/30/20 rule is a budgeting principle popularized by Senator Elizabeth Warren. It states that 50% of your after-tax income should go toward needs, like your mortgage payment, groceries and insurance costs. After that, 30% of your income should go toward wants and the remaining 20% should go toward savings.