Percentage of Income for Mortgage

• Use the 28/36 rule as a starting point, but adjust based on your full financial picture and lifestyle.
• There’s no one-size-fits-all percentage. Choose a monthly payment that leaves room for savings, emergencies, and long-term goals.

Determining what percentage of your income should go towards a mortgage is a crucial step in responsible homeownership. While there’s no one-size-fits-all answer, general rules and lender criteria can help you find the right balance between buying the home you want and staying financially stable.

Whether you’re buying a house in Denver or browsing homes for sale in Austin, this guide will help you figure out how much mortgage you can afford – and avoid stretching your budget too thin.

How to calculate your monthly percentage?

There’s no perfect number that fits everyone, but a few common rules can help you decide what’s affordable and sustainable. These guidelines are based on your gross monthly income (what you earn before taxes).

1. 28% / 36% Rule

This is one of the most widely used affordability benchmarks:

• • Spend no more than 28% of your gross income on housing costs (including your mortgage, property taxes, and homeowners insurance).
  • Keep total debt payments under 36%, including things like credit cards, student loans, and car payments.

Example (Gross Monthly Income: $8,000):

• Housing: Max $2,240 (28%)
• Total Debt: Max $2,880 (36%)

2. 25% Rule

This rule suggests capping your monthly mortgage payment—just principal and interest—at no more than 25% of your gross monthly income.

Example (Gross Monthly Income: $8,000):

• Mortgage Payment: Max $2,000 (25%)

This rule is often considered a more conservative approach, but it’s important to note that it doesn’t include property taxes, homeowners insurance, HOA fees, or maintenance costs. So while it can help keep your housing costs in check, you’ll still need to budget separately for those additional expenses.

3. 30% Rule

Some people stretch the limit slightly, especially in high-cost cities. This rule allows up to 30% of your income for housing expenses, but make sure you still have room in your budget for other goals.

Example (Gross Monthly Income: $8,000):

• Mortgage Payment: Max $2,400 (30%)

How do lenders determine your home affordability?

Mortgage pre-approval assesses your financial health to determine your borrowing limit, providing a clear house-hunting budget. Lenders assess your home affordability by evaluating a variety of factors to determine whether you can comfortably manage mortgage payments alongside your other financial obligations. Learning this information is key in determining, what percentage of your income should go to a mortgage. Here’s a breakdown of what lenders typically consider:

Credit score

Lenders prioritize your credit score, a key indicator of creditworthiness and financial responsibility. A higher score (ideally above 620) signals lower risk, increasing mortgage approval chances and potentially securing better interest rates.

Debt-to-income ratio (DTI)

Lenders use the debt-to-income (DTI) ratio to assess how much of your monthly income goes toward debt. Calculated by dividing total monthly debt payments by gross monthly income, a DTI below 43% is generally preferred, though some lenders may be flexible. This helps lenders evaluate your capacity for additional debt.

Income and employment history

Lenders require stable and sufficient income, usually two years in the same job or industry, for mortgage approval. Pay stubs and tax returns are common income verification documents.

Down payment

Your down payment impacts your loan amount, monthly payments, and interest rates. While conventional loans typically require 20% down, FHA or VA loans offer lower down payment options.

Assets and savings

Lenders assess assets, checking, savings, retirement, and investments to confirm financial stability. Adequate reserves demonstrate that you have a financial cushion for emergencies and can cover other expenses beyond the mortgage, such as closing costs and home maintenance.

Loan type and terms

Loan types (conventional, FHA, VA, USDA) vary in requirements and benefits, impacting interest rates and down payments. Lenders assess your financial readiness for homeownership, ensuring you can afford the mortgage and maintain financial health.

How to lower your monthly mortgage payments

When determining what percentage of income should go to a mortgage, these strategies can help you reduce your mortgage costs, save money, and achieve financial stability more quickly. Each option has its benefits, so consider your financial situation and long-term goals when deciding which strategies to pursue.