What Percentage of Your Income Should Your Mortgage Be?

What Is the 43% DTI Ratio Guideline?

Another common budgeting suggestion for ensuring affordability is the 43% debt-to-income (DTI) ratio guideline, which compares your total monthly debt payments to your gross monthly income. For example, if you earn $8,000 each month before taxes, a 43% DTI ratio would equal $3,440 in total monthly debt obligations, including your mortgage payment and other recurring debts.

Keep in mind that 43% isn't a specific mortgage requirement, though lenders do weigh DTI when making approval decisions. DTI requirements vary by loan type, lender, and other factors, and some borrowers may qualify with a higher DTI ratio. Even if you qualify for a certain mortgage amount, always consider your overall budget and financial goals when deciding how much of your income you're comfortable putting toward housing.

What Is The 35/45 Guideline?

Another budgeting tool — not an official lender guideline or requirement — the 35/45 guideline suggests capping your total debt payments, including your mortgage, at 35% of pre-tax income or 45% of after-tax income. Here’s how it might look:

• Pre-tax cap: Gross income x 0.35
• After-tax cap: Net take-home pay x 0.45
• Target range: Ideal monthly debt payment falls between the pre- and after-tax caps. 

This budgeting suggestion offers more flexibility than the classic 28% and 36% ratios and can make sense for higher earners who may be able to spend a larger percentage of their income on housing without jeopardizing their ability to afford the essentials.

What Is The 25% Post-Tax Model?

The 25% post-tax model, another rule of thumb used by some financial planners, says you should avoid spending more than 25% of your post-tax income on housing costs. For example, if your household brings home $6,000 per month after taxes, you’d aim to spend no more than $1,500 per month on total housing costs under the 25% post-tax model. 

This is a more conservative rule designed to help you have enough money for your other financial needs and future plans. If you have a limited income or want to achieve other big goals like saving for an early retirement, this approach may be best.

What Costs Influence Your Mortgage Payment?

When you’re trying to limit your mortgage payment to a reasonable percentage of income, it’s helpful to understand what costs influence your payment amount. That way, you’ll know what changes you may need to make to ensure your payment is affordable.

Here are the key factors that determine the monthly cost of your mortgage:

• Principal: A portion of each monthly payment goes toward repaying principal, reducing your loan balance.
• Interest: Part of your monthly payment goes toward interest, which is the cost of borrowing.
• Taxes: Most mortgage lenders require you to pay a portion of your property taxes each month, which is then put into an escrow account for when your taxes are due.
• Insurance: Many mortgage lenders also require you to pay a portion of your homeowners insurance costs into an escrow account each month.

Other Home Affordability Considerations

There are also many other factors affecting home affordability, including the following:

• Costs of homeownership: Beyond your mortgage, you’ll also have to pay for things like moving costs, utility bills in your new home, and home maintenance.
• Mortgage type: Some mortgages, like FHA and VA loan options can be more affordable with lower interest rates or smaller down payment requirements.
• Current housing market: In some markets, housing is more expensive. You’ll need to know your local market when deciding how much house you can afford. For example, higher home prices may mean adjusting your target price range, saving for a larger down payment, or considering a different location.
• Mortgage rate changes: Mortgage rates also change over time in response to factors such as 10-year Treasury yields and broader economic conditions. The good news is, if mortgage rates drop after you borrow, you can explore options with lower rates, such as a cash out refinance. By refinancing, the total finance charges may be higher over the life of the loan.

Percentage of Income and Your Mortgage Payment FAQs

How much of your income you should spend on your mortgage depends on your finances, loan terms, and overall budget. Here are answers to common questions about mortgage affordability and income guidelines.

How Do Lenders Determine How Much You Can Afford?

Mortgage lenders consider your income, debt-to-income (DTI) ratio, credit history, assets, down payment, and the loan program when determining how much you may qualify to borrow. Keep in mind that the amount you qualify for isn't necessarily the same as the amount you’ll feel comfortable spending or how much you can actually afford each month.

Are the 28% and 36% Income Guidelines Official Rules?

Budgeting ratios like the 28/36 rule are not lender guidelines or requirements. Mortgage lenders do look at your DTI and other financial factors when making approval decisions, but these requirements vary by lender and loan program. Exploring different budgeting suggestions can be a helpful tool to better understand how much home you can comfortably afford before shopping for a home and applying for a mortgage. 

What Happens If Too Much of Your Income Is Going to Your Mortgage?

Spending too much of your income on your mortgage and other housing expenses can leave less room in your budget for savings, emergencies, other debts, and everyday expenses. If you're struggling with your current mortgage payment, refinancing may be worth exploring to see whether you could lower your interest rate or monthly payment. By refinancing, the total finance charges may be higher over the life of the loan.

Final Thoughts: Income and Mortgage Affordability

It’s important to ensure that your mortgage is affordable. This may mean following one or more of the guidelines mentioned above or finding another way to determine what’s affordable for you, such as taking a close look at your budget. You should explore all of your options and work with a mortgage professional to get prequalified so you can get a clear picture of what loan is right for you.