What Percentage Of Income Should Go To A Mortgage?

When you’re shopping for a home, think carefully about how much of your monthly income you can reasonably dedicate to your mortgage payment. Figuring this out can mean the difference between living comfortably and being “house poor” — struggling to make ends meet month after month.

But how can you figure out how much to spend on your mortgage? Here are a few different rules you can apply.

What percentage of your income should go to your mortgage?

Every borrower’s situation is different, and it’s possible no one rule will fit you perfectly. But here are a few of the schools of thought on what percentage of income should go to mortgage payments.

28% rule

“The 28 percent rule is a traditional mortgage lending guideline stating that a homebuyer’s monthly mortgage payment shouldn’t exceed 28 percent of their gross monthly income. This includes principal, interest, taxes, and insurance,” says Reed Letson, owner of Elevation Mortgage in Colorado Springs, Colorado.

This 28 percent cap is based on a borrower’s front-end debt-to–income (DTI) ratio, or their monthly mortgage payment compared to their income.

“It’s based on decades of lending data showing that borrowers who keep their housing costs at or below this threshold are more likely to successfully manage their mortgage payments while maintaining financial stability for other necessities and savings,” Letson says.

Here’s an example for a borrower who earns $5,000 per month.

$5,000 x 0.28 (28%) = $1,400 (maximum monthly mortgage payment)

36% rule

The 36 percent model is another way to determine how much of your gross income should go toward your mortgage, and it can be used in conjunction with the 28 percent rule. While the 28 percent rule refers to your front-end DTI ratio, the 36 percent rule refers to what’s called your back-end DTI ratio.

“The 28 percent cap is about your housing costs — mortgage, taxes, insurance — and the 36 percent is your total debt load, including things like credit cards, car loans and student loans,” says Mike Roberts, co-founder of City Creek Mortgage in Draper, Utah.

Let’s say again that you have a $5,000 monthly income.

• $5,000 x 0.28 (28%) = $1,400 (maximum monthly mortgage payment)
• $5,000 x 0.36 (36%) = $1,800 (maximum monthly debt obligation including mortgage payment)

By this rule, you could still spend $1,400 on your monthly mortgage payment — but only if your other debt payments total $400 or less per month.

43% DTI ratio

While mortgage lenders prefer your back-end DTI ratio not to exceed 36 percent, in many cases, up to 43 percent is acceptable. At this level, your mortgage is still a “qualifying mortgage,” and Fannie Mae and Freddie Mac can purchase it from your lender.

Keep in mind that some lenders may allow borrowers to have higher DTI ratios with a strong credit score and substantial cash reserves.

Here’s how the 43 percent rule looks with that $5,000 monthly income.

$5,000 x 0.43 (43%) = $2,150 (maximum monthly debt obligation including mortgage payment)

Overall, though, the lower your DTI ratio, the higher your chances of getting approved for a mortgage.

25% post-tax model

These estimates all rely on your gross income. But how much of your net income — that is, your take-home pay — should go toward mortgage payments?

Many experts recommend that no more than 25 percent of your after-tax income go toward your monthly mortgage payments. Say you make $5,000 per month, but you receive $4,000 in your paycheck.

$4,000 x 0.25 (25%) = $1,000 (maximum monthly mortgage payment)

This net income model might be more viable to go by if something is notably affecting your take-home pay, like wage garnishment or aggressive retirement savings. It’s also ideal if you want a real daily sense of your cash flow.

Mortgage payments, income and today’s housing market

While 30-year mortgage rates peaked at over 8% in October 2023 and have fallen a bit since, they’re still much higher than they were in 2021. And prospective homebuyers are still dealing with high home prices and low housing inventory in many parts of the country, making affordability a continued challenge. The median mortgage payment for home purchase applicants nationwide was $2,133 as of November 2024, according to the Mortgage Bankers Association.

A December 2024 U.S. Home Affordability Index by AATOM, another real estate data analysis firm, found the portion of average local wages consumed by major expenses on median-priced, single-family homes was deemed unaffordable in about 70 percent of the 566 counties analyzed.

What costs make up your mortgage payment?

Principal

The principal is the amount of money you borrowed to purchase your home. When you first start repaying your mortgage, your servicer applies a smaller amount of your monthly payments to your principal debt and a larger share toward interest. This is called amortization. When you’re closer to paying off your mortgage, more of your payments will go toward principal.

Interest

Interest is the fee you pay the lender for lending you money, a percentage of the total amount you borrowed to buy your home.

Taxes

A portion of your monthly payments likely goes into an escrow account, and from there, goes toward your property tax bill. When your bill is due, your servicer pays it from the amount accumulated in your account.

Insurance

Similar to your property taxes, your servicer likely also pays your homeowners insurance premiums from your escrow account, which you fund with your monthly payments.

If you made less than a 20 percent down payment on your home, you may also be paying for private mortgage insurance (PMI). This coverage protects the lender in case you default on the loan, and it’s included in your monthly mortgage payments.

How do lenders determine what you can afford?

We’ve laid out some general rules, but lenders use these and other factors to decide how much you can afford — and how much they’ll lend you. For example:

• Gross income: Your gross income is your total earnings before taxes and other deductions are factored in. Other sources of income, such as spousal support, a pension or rental income, are also included in gross income.
• DTI ratio: Lenders typically care most about your total monthly debt obligations divided by your total gross income.
• Credit score: Your credit score is a major factor lenders use to evaluate how much you can afford. In general, the higher your credit score, the lower your interest rate, which impacts how much you can feasibly spend on a home.
• Work history: To ensure you can repay your mortgage, lenders want you to have a stable source of income. You’ll typically be asked to provide evidence of employment (such as a pay stub) from at least the past two years. If you work for yourself, you’ll be asked to provide tax returns and other business records.

How to lower your monthly mortgage payments

If you want to buy a house, but you think a mortgage might eat up too much of your monthly income, there are ways to lower your payment. You could:

• Work on your credit score: A better credit score will earn you a lower interest rate, and even a slightly lower rate can mean a much lower monthly payment. Test it out with Bankrate’s mortgage calculator.
• Save up for a bigger down payment: The more money you put down, the less you’ll need to borrow for your mortgage. Plus, if you can put down at least 20 percent, you won’t need private mortgage insurance, which would otherwise make up part of your monthly payment.
• Shop around for homeowners insurance: If you can save money on your homeowners insurance, you’ll have a little less you need to deposit in your escrow account each month.

While most homeowners choose a 30-year mortgage, if you were considering a 15-year mortgage, know that a longer term would make your monthly payments more affordable. And if you do end up with a mortgage with a higher rate than you’d like, you can refinance when rates drop, reducing your monthly payment.

Other considerations for what you can afford

Costs of homeownership

Figuring out how much of your monthly income should go to a mortgage is key to choosing an affordable home. But as any homeowner can attest, the expenses of owning and maintaining a home include much more than just the mortgage, such as HOA fees and utility payments.

Other homeownership costs can include:

• Home maintenance, including an emergency fund and savings for future repairs
• Pest prevention
• Security systems

If your budget doesn’t have some wiggle room for these expenses, you may want to reconsider how much you’re willing to spend on your mortgage.

Mortgage type

The kind of mortgage you choose also impacts how much home you can afford. To find a loan that’s right for you, it’s important to explore all your options, including conventional, FHA and VA loans.

“You should have a deep-dive conversation with your loan officer about your needs, wants, and goals,” says Letson. “In order for your loan officer to help you, they need to understand everything you are trying to accomplish. Without seeing the full picture, they will not be able to properly advise you on the best loan product for your scenario.”

Ultimately, the percentage of your income for mortgage payments is just one portion of finding the right home loan for you.

FAQ

• What happens if I take on a mortgage that’s more than I can afford?

  Taking on a mortgage payment that is more than you can afford may leave you with little free cash for other living expenses or emergencies. It can also put you at risk of falling behind on payments and defaulting, potentially losing your home.

• How much of your monthly income should go to your mortgage if you’re self-employed?

  The specific percentage of income that should go toward your mortgage payments isn’t necessarily different if you’re self-employed. However, if you’re self-employed, mortgage lenders may want to see that you have more cash reserves than an applicant with a traditional job. They also typically require at least two years of stable self-employment income.