How much of your income should go toward a mortgage?

Before you start the homebuying process, it’s important to figure out how much you should spend on your home. This insight can help you avoid a monthly mortgage payment that’s way too high. But determining what’s affordable versus what isn’t can be challenging.

Fortunately, some basic guidelines can serve as a baseline for calculating home affordability. If you’re in the market for a home and questioning what’s within your budget, here’s what to know. 

What percentage of your income should toward your mortgage payment?

Overall, the amount you should spend on your monthly mortgage payment depends on your salary, current debt and financial goals. If you’re uncomfortable taking on debt, you can always choose to spend less than what you qualify to borrow. Here are some common formulas you can use as a starting point. 

The 28% rule

Best for: Those who want an affordable housing payment and need to figure out how much of their income should go toward a mortgage payment each month.   

Borrowers frequently use the 28% rule when determining an affordable housing payment. This rule states that your total mortgage payment — including principal, interest, taxes and insurance — shouldn’t exceed 28% of your gross monthly income. So if you and your partner earn $12,000 before taxes, for example, then your monthly mortgage shouldn’t be any higher than $3,360. 

The 28%/36% rule

Best for: Those who have other debts, like a car payment, and want their overall debt load to feel manageable.

The 28%/36% rule ensures you keep all of your debts under control. With this rule, your mortgage payment shouldn’t exceed 28% of your gross monthly income, and your total monthly debts (including your housing payments) shouldn’t exceed 36%. So if your gross household income is $12,000, then you can spend up to $3,360 on your mortgage, while your other debts shouldn’t exceed $960 — for a total monthly debt load of $4,320. 

The 35%/45% rule

Best for: Those without a lot of monthly expenses, and are comfortable dedicating a larger portion of their income toward housing payments. 

This two-part rule also provides guidance for the amount of debt you should have relative to your income. But it gives you more wiggle room for the amount you can spend. Under this rule, your total monthly debts, including your housing payment, shouldn’t be more than 35% of your gross income or 45% of your take-home pay. So let’s say you earn $12,000 before taxes, but you bring home $10,000. With this rule, your monthly debts shouldn’t exceed $4,500. 

The 25% post-tax rule

Best for: Those with significant debt that want to avoid financially overextending. 

The 25% rule has the strictest guidance for home affordability. It states that your housing payments should be less than 25% of your monthly take-home pay. So if you make $10,000 after taxes, then you shouldn’t take on a monthly mortgage payment over $2,500. This rule of thumb may be a good fit for borrowers with a lot of existing debt, like a large student loan or credit card balance.

How to calculate mortgage affordability

There are several different methods for calculating mortgage affordability. The best rule for you depends on your financial situation and goals. 

“There’s no one-size-fits-all answer to what percentage of your income should go toward your mortgage,” says Carl Holman, communications manager at A&D Mortgage. 

When you choose a formula to follow, you should “consider all aspects of homeownership, and stick to a budget that aligns with your financial well-being and aspirations,” Holman says. 

How lenders determine what you can afford

Mortgage lenders look at several factors when determining the size of the mortgage you can afford. Here’s what they generally consider:

• Monthly income: Your monthly income will factor into your loan size. The lender will ask for pay stubs and tax returns to verify your gross and after-tax income. 
• Monthly debt: Your lender will also look at your monthly debts, including any loan and credit card payments, and use this information to calculate your debt-to-income (DTI) ratio. Generally, lenders prefer an overall DTI ratio below 43%, though requirements vary with each lender and mortgage type. 
• Credit: Lenders also review your credit history and credit score to see if you qualify for the mortgage and set your mortgage rate. Generally, borrowers with excellent credit receive the best rates. 
• Down payment: Your down payment amount will also factor into the amount you can borrow. If you have a significant amount set aside for a down payment, you might qualify for a larger mortgage. 

How to lower your monthly mortgage payments

Here are some steps you can take before you buy that could make your payments more affordable:

1. Boost your down payment. Increasing your down payment could help reduce your monthly mortgage payments because you borrow less. Plus, you may be able to avoid private mortgage insurance (PMI), which is often required if you put down less than 20% for a conventional home loan. 
2. Improve your credit. A higher credit score can help you qualify for a lower mortgage rate, which translates to lower home loan payments. 
3. Buy a less expensive home. You can also decide to buy a less expensive home if you’re seeking lower mortgage payments. You may need to sacrifice some items on your wishlist, such as an updated bathroom or kitchen, but it could end up being a wise financial move in the long term. 

Tip: If you have an existing home loan and want to reduce your payments, refinancing your mortgage to a lower rate or a longer-term loan may help.

Other homebuyer costs to keep in mind

Your monthly housing payment isn’t the only cost to consider when you buy a home. It’s also important to keep other costs in mind, including:

• Regular home maintenance.
• Lawn care and landscaping.
• Unexpected home repairs.
• Planned home projects.

Some of these costs can amount to thousands of dollars, so it’s essential to account for them when determining how much home you can afford.