Editorial Note: We earn a commission on partner links on Forbes Advisor. Commissions do not affect the opinions or ratings of our editors.
When buying a home, your income plays a major role in determining the price of the home you can afford. You will need to have enough income to prove to the lender that you can make your mortgage payments on time.
There are different rules and standards to follow, but there is no single method for determining how much of your income should go towards a mortgage payment. Here’s what to consider before deciding which method is right for you.
How much of your income should go to the mortgage?
There are a few more popular models for determining how much of your income should go to your mortgage.
The 28% rule
The 28% rule states that you should not spend more than 28% of your gross monthly income on mortgage payments, including taxes and home insurance. Gross income is what you earn before taxes are taken.
Example: Let’s say you earn $7,000 each month in gross household income. Multiply that by 28% and that’s roughly what you can expect to spend each month towards your monthly mortgage payment. So, with a gross income of $7,000, your monthly house payment should be around $1,960 using the 28% model.
The 28/36 model
The 28/36 rule is an addendum to the 28% rule: 28% of your income will go towards your mortgage payment and 36% towards all other household debts. This includes credit cards, car loans, utility payments, and any other debt you may have.
Example: With a gross income of $7,000, 36% would be $2,520. In addition to your mortgage payment of $1,960, you have $2,520 left to cover other needs.
The 35/45 model
Using the 35/45 method, no more than 35% of your gross household income should be spent on all your debts, including your mortgage payment. Another way to calculate, however, is that no more than 45% of your take home pay — or after-tax dollars — should go towards your total monthly debt.
Example: With a gross monthly income of $7,000, 35% would equal $2,450 for all your debts. But let’s say that after taxes, insurance and other deductions, your take home pay is $6,000. Multiply that by 45% and you get $2,700. Your range (for all your debts) would therefore be between $2,450 and $2,700.
The 25% after tax model
While some other rules use your gross income as a starting point, this one uses your net income for the calculations. It says 25% of your after-tax income will go towards paying for your house.
This model gives you the least amount of money to spend paying for your home. If you’re looking for a house soon but have a lot of debt, like a car payment, student loans, or credit cards, this method might be best for you so you don’t bite more than you cannot chew.
Example: So if your net salary is $6,000 per month, your monthly mortgage payment should not exceed $1,500.
How to determine how much house you can afford
Most people use a mortgage to buy a home, but everyone’s income and expenses are different. For this reason, you’ll want to calculate your potential monthly payment based on your current financial situation. You will need to calculate some numbers like:
- Revenue: This is the amount you earn monthly from your usual daily work and all the side activities you have. Make sure you have the gross and net numbers handy. You can find them on your last payslip. If you have a fluctuating income, use your most recent tax returns to guide you.
- Debt: Debt is what you currently owe money on. This would include things like credit cards, student loans, auto loans, personal loans, and other types of debt. Debt is not the same as expenses, which can fluctuate from month to month (like food and gas, for example).
- Advance payment: This is the amount of cash you will pay upfront for the cost of a house. A 20% down payment can remove private mortgage insurance (PMI) fees from your monthly costs, but buying a home isn’t always necessary. However, the higher your down payment, the lower your monthly mortgage payment will be.
- Credit score: Having good or excellent credit means you can get the lowest interest rate offered by lenders. A high interest rate usually means a higher monthly payment.
How lenders decide how much you can afford
Lenders use a few different factors to determine what home price you can afford. They use your debt-to-equity ratio, or DTI, to make sure you can comfortably pay your mortgage as well as your other debts. This includes credit cards, car loans, student loan payments and more.
You can calculate your DTI ratio by adding up all your debt payments and dividing it by your gross monthly income. Let’s say your monthly income is $7,000, your car payment is $400, your student loans are $200, your credit card payment is $500, and your current payment is $1,700. $. All of that together is $2,800. So your DTI ratio is 40% since $2,800 is 40% of $7,000.
In general, a good DTI to aim for is between 36% and 43%. Some lenders will go higher, but the lower your DTI, the more likely you are to be pre-approved for a mortgage. However, different lenders have different DTI requirements, so compare multiple mortgage lenders to find one that’s right for you.
How to lower your monthly mortgage payment
Your monthly mortgage payment is going to eat up a good chunk of your overall debt, so anything you can do to lower that payment can help. Consider some options, such as:
- Find a cheaper house. Although your lender may approve you for a loan up to a certain amount, you are not necessarily obligated to purchase a home for the full amount. The lower the price of the house, the lower your monthly payments will be.
- Boost your deposit. The higher your down payment, the lower your monthly payment will be. So if you can, save up so you can secure that lower payment.
- Get a lower interest rate. Most of the time, your interest rate is based on your credit score and your DTI. Try to pay off outstanding debts, such as credit cards, car loans, or student loans. This not only lowers your DTI, but could also improve your credit score. A higher credit rating means you may get a lower interest rate from your lender.
Other Home Buying Costs to Consider
Buying a home is usually the most expensive purchase a person makes in their lifetime. On top of that, other small fees can really add up and increase the total cost of this purchase. You are also responsible for other costs, such as:
- Regular maintenance: You will need to maintain your house. And sometimes that means ongoing maintenance for extras like a pool. In addition to the regular maintenance of the pool, there is also the patio or the terrace on which the pool is located, which may require annual pressure washing, for example.
- Lawn care: If your community does not pay for a lawn maintenance crew, you are on your own for all your lawn and hedge care. This means hiring a company to do it for you or buying the proper tools to do it yourself.
- Home improvements and repairs: It could be anything from a new garage door to a change in kitchen cabinet handles. It could also be a new toilet or a new roof.
When you are home shopping, a completed inspection report will tell you of any major concerns that need attention. If certain items are outdated, you can use them as negotiation tools to reduce the cost of the house price or have new ones installed before you buy.
Faster and easier mortgages
Check your rates today with Better Mortgage.