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What percentage of your income should go to a mortgage?

Yahoo Personal Finance· Getty Images
Michele Lerner
Updated 8 min read

Determining how much of your income should go to your mortgage should start with your budget and long-term financial plan, but there are also formulas you can use to help.

One of the simplest is a rule of thumb to borrow a maximum of two to three times your household income to buy a home. According to the Census Bureau, the median household income in the U.S. was just under $75,000 in 2022. If you earn the median income, this rule suggests you borrow between $150,000 and $225,000 for a home.

Other rules are slightly more complicated but are commonly used by home buyers and lenders.

In this article:

Learn more: Best mortgage lenders for first-time home buyers

Generally, the most popular rule followed by lenders and borrowers to determine how much your mortgage should be is known as the 28/36 rule. The 28% rule refers to what mortgage lenders call your front-end ratio, which compares your housing costs with your income. Lenders prefer that no more than 28% of your gross monthly income (the amount you earn before taxes) should be spent on your monthly mortgage payment, including your mortgage principal, interest, homeowners insurance, property taxes, and homeowners’ association fees. The 28% rule does not factor in other housing costs, such as utilities.

For example, if you have the median income of $75,000, your gross monthly income is $6,250. To meet the 28% rule, your monthly mortgage should be $1,750 or less.

The 36% rule refers to what mortgage lenders call your back-end ratio, which compares all recurring debt, including your housing payment, with your income. Lenders prefer that no more than 36% of your gross monthly income should be spent on monthly debt payments.

For instance, if your gross monthly income is $6,250 as in the example above, your monthly debt payments should be $2,250 or less.

If you have payments in addition to a mortgage, such as a car payment or a student loan, this rule can help you maintain manageable mortgage payments.

While the 28/36 rule is commonly used, many lenders are more flexible with their loan requirements. Some loans, particularly those insured by the government, such as FHA, VA, and USDA loans, allow borrowers to have higher debt levels.

In addition, there are other ways to calculate the percentage of income for a mortgage, including the 35/45 rule, which refers to another way of measuring your overall debt.

Lenders want your monthly debts to be affordable and recommend keeping your total monthly debt — including your mortgage payment — under 35% of your pretax income and 45% of your post-tax income.

To calculate what percentage of your income should go to your mortgage with this method, you can determine your monthly income before taxes and multiply it by 35%, or 0.35. Then multiply your monthly after-tax income by 45%, or 0.45. An affordable monthly debt payment should be in the range of these two results.

For example, if your gross (pretax) monthly income is $6,250, your monthly debt payments should be $2,187 or less. Monthly after-tax pay varies by state, but for gross monthly income of $6,250, your after-tax pay is approximately $4,855 in some states. In that case, your total monthly debt payments should be $2,185 or less.

This rule can give you a better sense of what percentage of your income should go to your mortgage because it considers your after-tax pay.

The strictest rule that some lenders and borrowers follow is the 25% rule, which says your monthly housing payment should be 25% or less of your monthly take-home pay. In the scenario above, you would need your monthly mortgage payment to be $1,214 or less.

If you’re concerned about overspending or have significant expenses besides your housing payment, the 25% rule can provide a guideline for how much your mortgage should be.

Dig deeper: How much house can you afford? Use the Yahoo Finance home affordability calculator.

While your income is an important determinant of how much your mortgage should be, other factors impact how much you can borrow. Lenders will also review:

  • Your debt. Your lender will compare your gross monthly income with the minimum payment on all recurring debt, including your housing payment, to find your debt-to-income ratio (DTI). Your maximum allowable DTI depends on the loan program and lender, but generally, the lower your ratio is, the more easily you can qualify for a mortgage.

  • Your credit score. Lenders review your credit score to evaluate how well you handle debt repayment. In general, borrowers with a higher credit score have a better chance of loan approval and pay lower rates. Borrowers with a credit score above 740 typically pay the lowest mortgage rates.

  • Your down payment. A higher down payment means you’re borrowing less and can result in a lower mortgage interest rate.

Learn more: Getting a mortgage with good (but not great) credit

There are several ways to lower your mortgage payment. These will either result in borrowing less (so your loan amount is lower) or in locking in a lower interest rate.

  • Increase your credit score. Paying your bills on time and reducing your debt can improve your credit score. Conventional loans have different rates depending on your credit score, and the lowest mortgage rates are reserved for borrowers with a credit score of 740 or higher.

  • Make a bigger down payment. If you make a down payment of 20% or more, you won’t have to pay private mortgage insurance (PMI) as part of your housing payment. In addition, your home loan balance will be lower, and your mortgage rate will be lower.

  • Consider a longer loan term. Your monthly housing payments are lower when you stretch them out for a longer term, although you pay more interest over the life of the loan.

Dig deeper: How to save for a house in 7 easy steps

Formulas that estimate your chances of a loan approval based on your income are helpful — but there are factors that influence how much of your income to spend on your mortgage that don’t appear on typical mortgage applications.

Mortgage lenders will see recurring debt such as student loans, car loans, and credit card payments on your credit report, but items such as childcare and life insurance premiums are not factored into your DTI or housing costs. Neither is discretionary spending for vacations, gifts, and activities such as golf or skiing.

Regardless of how much a lender says you can borrow, you’ll want to look carefully at all your expenses to decide how much you want to spend on your mortgage payments. Saving for retirement, college tuition, or other financial goals should also be considered when estimating what percentage of your income should go to your mortgage.

Read more: How much money do I need to buy a house?

Spending 40% of your total income on your mortgage is probably too much — most mortgage lenders will either not approve your application or charge you a very high interest rate. Perhaps more importantly, it could make you "house poor" to spend so much of your income on a mortgage, leaving little room for other expenses.

The amount of house you can afford with a $120,000 salary depends on how much other debt you have and the size of your down payment. Assuming you have no other monthly debts and are putting down a 3% down payment, you should be able to afford a house priced at around $470,000 with a $120,000 salary.

According to the commonly used 28/36 rule, no more than 28% of your pre-tax monthly income should go toward your mortgage payment (including property taxes, homeowners insurance, and mortgage insurance). The 25% rule states your monthly payment should not exceed 25% of your post-tax monthly income.

Yes, your down payment impacts your mortgage payment in several ways. First, your loan balance depends on how much of the purchase you cover with your down payment. In addition, if your down payment on a conventional loan is less than 20%, private mortgage insurance will be included in your monthly payment. Your interest rate may also be impacted by the size of your down payment.

In addition to the principal and interest on your loan, you’ll need to pay homeowners insurance and property taxes. Depending on the type of mortgage loan and size of your down payment, you might pay for mortgage insurance. If you buy a home within a homeowners’ association, you must pay homeowner’s association dues. Other housing expenses include utilities, maintenance, and repairs.

Your debt-to-income ratio should be as low as possible. Many lenders cap the maximum DTI ratio at 43%, but some lenders and loan programs allow a ratio as high as 50%.

Yes, your mortgage payment can change for several reasons. If you have an adjustable-rate mortgage (ARM), your interest rate can change according to the terms of your loan. In addition, your payment can change if your private mortgage insurance is eliminated, which automatically happens when your loan-to-value ratio is scheduled to reach 78%. Other adjustments to your mortgage payment occur when your property taxes or homeowners insurance premiums change.

This article was edited by Laura Grace Tarpley