What Percentage of Income Should Go to Mortgage?

Written by Banks Editorial Team
4 min. read
Written by Banks Editorial Team
4 min. read

Before shopping for a new home, you’ll need to figure out how much house you can afford. Lenders will evaluate your income, debt load and credit score to come up with a figure. But prior to applying for a mortgage, there are several models you can use to determine the maximum amount of your monthly earnings that should go towards mortgage payments, even if it’s lower than what the lender offers. 

How Mortgage Payments Work

When you take out a home loan, you make monthly mortgage payments to the lender over a set period until the balance is paid in full. All mortgage payments include principal and interest, and some also include homeowners insurance and property taxes. 

What Percentage of Income Should Go to Mortgage?

There are four common models prospective homebuyers use to calculate the percentage of income they should spend on a monthly mortgage payment. 

The 28% Rule

As the name suggests, this rule states that no more than 28 percent of your gross income should go toward your monthly mortgage payment. So, if your gross monthly income is $8,000, your monthly mortgage payment should not exceed $2,240. 

The 28/36 Model

The 28/36 model suggests that no more than 28 percent of your income be allocated to your mortgage payment and 36 percent to all other household debt, including credit cards, student loans and personal loans. So, for example, if you earn $10,000 each month before taxes, your mortgage payment should be capped at $2,800, and household debt shouldn’t be more than $3,600.

The 35/45 Model

This model states that the sum of your monthly debt obligations and mortgage payments should not exceed 35 percent of your pre-tax income (or gross earnings) or 45 percent of your post-tax income. To illustrate, if your monthly gross earnings are $9,500 and net earnings are $8,000, your monthly mortgage payment should be between $3,325 ($9,500 * .35) and $3,600 ($8,000 * .45).

The 25% Post-tax Model

You’ll want to keep your monthly mortgage payments below 25 percent of your net earnings per this more conservative model. So, if you’re compensated $7,800 after taxes, your monthly mortgage payment should be no more than $1,950 ($7,800 * .25).

What Factors Affect Your Mortgage Payments?

The following components make up your monthly mortgage payment: 

  • Principal: the total amount you borrow
  • Interest: the price you pay the lender for the loan
  • Taxes: property taxes assessed at the local level
  • Homeowners insurance: premiums to a coverage homeowners policy that protect your property if it’s damaged or destroyed
  • Mortgage insurance: required if you put less than 20 percent down
  • Association fees: homeowners association (HOA) and community development district (CDD) fees (if applicable)

How to Know How Much Mortgage You Can Afford

You’ll often find that prospective buyers use affordability calculators to determine how much they should spend on a home. But before doing so, consider these factors to come up with a practical figure: 

  • Monthly income: What are your gross and net earnings each month?
  • Current debt load: How much are you spending each month on minimum monthly debt obligations? What is your debt-to-income (DTI) ratio?
  • Credit score: Is your credit score high enough to get you a competitive rate, or is it on the lower end?
  • Desired down payment: Can you afford to make the required down payment on the loan amount you’re considering?

How to Lower Your Monthly Mortgage Payments

There are ways to lower your monthly mortgage payment if they aren’t quite working for your budget: 

Choose a Less Expensive House

Even if the lender pre-approves you for a sizable home loan, it’s up to you to decide how much of that amount you want to spend. It could be tempting to spend the maximum amount you’re allowed to get the more luxurious home, but a less expensive option could be ideal for your spending plan.

Improve Your Credit Score

You’ll improve your chances of qualifying for a lower interest rate by boosting your credit score. A higher credit score shows the lender that you responsibly manage your debt obligation. It also means that the likelihood of defaulting on your monthly mortgage payments is low. In addition, you can improve your credit score by paying your bills on time, lowering the balances on revolving credit and refraining from opening new accounts that result in hard inquiries and decrease your credit age. It’s equally important to dispute any errors on your report that could be dragging your credit score down. 

Get a Longer Mortgage Term

A longer mortgage term will give you a more affordable monthly payment. But there are a few downsides to consider. You could get a higher interest rate than you would if you opted for a shorter term. Furthermore, the lender will have more time to collect interest from you, which increases your total borrowing costs over time. 

Make a Bigger Down Payment

Consider making a larger down payment to reduce the amount you need to borrow, lowering the monthly mortgage payment. For example, if you take out a 30-year $425,000 loan with a 7 percent interest rate and put down 5 percent, you’ll get a $2,686 monthly payment (principal and interest only). But if you increase the down payment to 20 percent, the monthly payment will drop to $2,262. 

Eliminate Your PMI

If you put down 20 percent or more, you will also avoid having to fork over costly private mortgage insurance (PMI) premium payments. 

Request a Tax Reassessment

Once you’ve purchased your home, contact the State Board of Equalization along with the property tax assessor in your county to arrange a hearing. They will analyze your property to determine if the among you’re being assessed in property taxes is accurate or should be decreased. If the latter applies, you’ll see a drop in your monthly mortgage payments. 

Refinance Your Mortgage

Have interest rates dropped since you took out your current mortgage? Assuming your credit score is at the same level or better than it was when you initially applied, consider refinancing to secure a better rate.

You can start the process with a reputable online lender, like Zero Mortgage, that takes the guesswork out of navigating the refinancing process from start to finish. Then, in less than 15 minutes, you can get a rate quote to decide if swapping out your current mortgage with a new one makes financial sense. Plus, you’ll receive guidance from an experienced member of the Zero Mortgage team to help you make an informed decision.

Explore your options by visiting the website and applying today.

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