Key Takeout: Use the 28/36 rule as a starting point, but adjust based on your full financial and lifestyle. There is no proportion of all sizes. Choose monthly payments that leave room for savings, emergency situations and long-term goals.
Deciding whether to direct your income percentage towards a mortgage is a key step in responsible homeownership. There are no answers for all sizes, but general rules and lender standards can help you find the right balance between buying the home you want and staying financially stable.
Whether you’re buying a home in Denver or browsing a home for sale in Austin, this guide will help you figure out how much you can afford and not shrink your budget too much.
How to calculate monthly percentages?
There are no perfect numbers that everyone can fit in, but some general rules help you decide what’s affordable and sustainable. These guidelines are based on your monthly total income (what you earn before tax).
1. 28%/36% Rule
This is one of the most widely used and affordable benchmarks.
Spend less than 28% of your total income on housing expenses (including mortgages, property taxes and homeowner insurance). Keep your total debt payments below 36%, including credit cards, student loans, and car payments.
Example (total monthly income: $8,000):
Home: Up to $2,240 (28%) Total debt: Up to $2,880 (36%)
2. 25% rule
The rules suggest that monthly mortgage payments (principal and interest) are limited to less than 25% of your total monthly income.
Example (total monthly income: $8,000):
Mortgage payments: Up to $2,000 (25%)
While this rule is often viewed as a more conservative approach, it is important to note that it does not include property taxes, homeowner insurance, HOA fees, or maintenance costs. So, while it helps to keep housing costs down, you need to budget individually for those additional costs.
3. 30% rule
Some people slightly extend the limit, especially in high-cost cities. This rule allows up to 30% of housing expenses income, but make sure you still have space in your other target budget.
Example (total monthly income: $8,000):
Mortgage payments: Up to $2,400 (30%)
How does a lender determine the affordability of your home?
Pre-approval of a mortgage will assess your financial health, determine borrowing restrictions, and provide a budget to hunt a clear home. Lenders assess the affordability of the home by assessing a variety of factors to determine whether they are comfortable managing their mortgage payments along with other financial obligations. Learning this information is important in deciding whether your income should go to a mortgage. This is a breakdown of what lenders usually consider.
Credit score
Lenders prioritize credit scores, which are key indicators of credit scores and financial responsibility. A higher score (ideally above 620) could reduce risk, increase the likelihood of mortgage approval, and ensure better interest rates.
Debt to Income Ratio (DTI)
Lenders use the debt-to-income (DTI) ratio to assess how much of their monthly income is spent on debt. Although a DTI of less than 43% is generally recommended, calculated by dividing the monthly total debt payment by the monthly total revenue, some lenders are flexible. This will help lenders assess their ability to add debt.
History of income and employment
Lenders usually require a stable and adequate income for two years in the same job or industry to approve a mortgage. Payment stubs and tax returns are general income verification documents.
down payment
Down payments affect the amount of the loan, monthly payments, and interest rates. Typically, traditional loans require a 20% downturn, while FHA or VA loans offer a lower down payment option.
Assets and savings
Lenders assess assets, checks, savings, retirements and investments to confirm financial stability. A proper reserve indicates that there is financial cushion for emergencies and can cover other non-mortgage expenses, such as closure costs and home maintenance.
Loan type and conditions
Loan types (traditional, FHA, VA, USDA) have different requirements and benefits, which affect interest rates and declines. Your lender will assess your financial preparedness for homeownership, allowing you to afford a mortgage and maintain financial health.
How to lower monthly mortgage payments
When deciding whether to place a percentage of your income on a mortgage, these strategies can help you reduce mortgage costs, save money, and achieve financial stability more quickly. Each option has its advantages, so consider your financial situation and long-term goals when deciding on the strategy you want to pursue.
Earn bigger down payments: Large down payments can help you reduce your mortgage, reduce monthly payments and total interest, and avoid private mortgage insurance (PMI). Consider the terms of the loan. Choosing a 15-year mortgage over a 30-year mortgage will result in higher monthly payments, but you can save on a large interest rate. Conversely, if you extend your mortgage to a 30-year mortgage, your monthly payments will be reduced by spreading your principal and interest over the long term. Make additional payments: Paying additional fees to the mortgage principal can significantly reduce the total interest paid, even in small amounts. Consider rounding up your payments or squatting for a while. Mortgage Refinance: Mortgage refinance can reduce monthly payments and interest costs by ensuring lower fees. Compare offers including fees to see if it suits you.
So, what percentage of your income should go to your mortgage?
Rules such as 28/36, 25%, and 30% provide guidance, but the ideal percentage will depend on your own financial situation, such as your credit score, income, debt, and down payment. Regularly review and adjust your mortgage strategy (refinance, additional payments, or period changes) ensures manageability and sustainability with your financial goals.
FAQ
Is the 28/36 rule strict restrictions?
No, that’s a guideline. The lender will use it for qualifications, but your personal comfort and financial situation may vary. However, if these percentages are significantly exceeded, it will put a strain on your budget.
Should 28% housing costs include utility?
28% usually refers to Piti (principal, interest, taxes, insurance). The utility is housing costs, but is usually not included in this particular calculation for lending purposes. However, they should be considered in your overall monthly budget.
What happens if my income fluctuates?
If your income is irregular, you are wise to make your mortgage affordable based on your lowest consistent income or average of your income over a longer period.
Can I get a mortgage if my debt-to-income ratio is above 36%?
It may be more challenging, but it’s not impossible. Lenders may consider other factors, such as strong credit scores, large down payments, and significant savings. However, it is generally recommended that you reduce your debt-to-income ratio before applying for a mortgage.
