What Percentage Of Income Should Go To A Mortgage?

Nov 21, 2022 | Mortgage

You’ve done your research, and you’re ready to buy a house. But how “much house” can you actually afford? What percentage of income should go to the mortgage? A common rule of thumb is that your monthly mortgage payment should not exceed 28% of your gross income. But is that really the best way to determine how much you can afford?

 

Understanding The Financial Commitment

 

A mortgage-to-income ratio is just one factor lenders use to determine your ability to repay a loan. When you’re a first-time home buyer, getting caught up in the excitement of finally owning your own home is easy. But before you start packing your boxes and planning your housewarming party, you need to understand the true financial commitment you’re about to make. One of the biggest questions you’ll need to answer is this: how much of your income should go towards your mortgage payment? Mortgage percent of income is one factor that lenders look at when considering whether or not to approve a loan.

 

The front-end ratio, also known as the mortgage-to-income ratio, is the percentage of your gross monthly income that you spend on your mortgage payment. Lenders typically prefer to see a front-end ratio of no more than 28%. For example, if you make $3,000 per month, your monthly mortgage payment should not exceed $840.

 

How Much House Can You Afford?

 

So, what percentage of your income should your mortgage be? The answer to this question depends on a number of factors, including your income, debts, and down payment. To get a better idea of how much house you can afford, it’s important to look at all these factors together.

 

Income

 

Obviously, your income is the most critical factor in determining how much house you can afford. But it’s not just your take-home pay that counts. You also need to factor in things like overtime, bonuses, and other forms of income that you may receive. Lenders will typically consider your gross monthly income, which is your total income before taxes and other deductions are taken out.

 

Debts

 

Do you have any outstanding debts? If so, you’ll need to factor those payments into your budget as well. This includes things like credit card bills, student loans, and car payments. The more debt you have, the less money you’ll have available for a mortgage payment.

 

Whether we like it or not, your debts play a significant role in determining how much of your income can go towards your mortgage payment. That’s because your monthly debt obligations, including your mortgage payment, can’t exceed a certain percentage of your gross monthly income. This percentage is known as your debt-to-income ratio or DTI. To calculate your DTI, lenders add up all your monthly debt payments and divide them by your gross monthly income. Most lenders prefer to see a DTI of 36% or less. So if your gross monthly income is $3,000, your monthly debt payments shouldn’t exceed $1,080.

 

Down Payment

 

How much money do you have for a down payment? The answer to this question will have a big impact on how much house you can afford. The larger your down payment, the less money you’ll need to finance, and the lower your monthly payments will be. A down payment of 20% or more will also help you avoid paying PMI (private mortgage insurance), which will further lower your monthly payments.

 

Keep in mind that your down payment doesn’t just impact your monthly payments. It also affects how much house you can afford. You’ll generally need a down payment of at least 3.5% of the purchase price to qualify for a mortgage. So if you’re planning to buy a $200,000 home, you’ll need at least $7,000 for a down payment.

 

So What Percent of Income Should Go To A Mortgage?

 

There’s no easy answer when it comes to budgeting for a mortgage payment. Many factors will come into play, including the type of loan you’re taking out, the interest rate, the term length, and your personal financial situation. However, some general guidelines can help determine how much of your income should go towards your monthly mortgage.

 

If you’re taking out a conventional loan, most experts recommend that your monthly mortgage payment should not exceed 28% of your gross income (that’s before taxes and other deductions). So, if you’re making $4,000 per month before taxes, your monthly mortgage payment shouldn’t be more than $1,120. This may seem like a lot, but remember that this includes things like principal, interest, property taxes, homeowners insurance, and private mortgage insurance (if you’re putting less than 20% down on your home).

 

The guidelines are a bit different if you’re taking out an FHA loan or a VA loan. For these loans, your monthly mortgage payment—including principal, interest, property taxes, and homeowners insurance—should not exceed 31% of your gross income. So if you’re making $4,000 per month before taxes (again), your monthly mortgage payment shouldn’t be more than $1,240.

 

Other Considerations

 

While the 28%/31% guidelines are a good starting point, they’re not the be-all, end-all when it comes to budgeting for your mortgage. In reality, you may be able to afford a higher or lower monthly payment, depending on your individual financial situation. For example, if you have a lot of other debts that you need to pay each month (e.g. student loans, credit card debt, etc.), you may need to put a larger portion of your income towards your mortgage in order to stay within your DTI ratio. On the other hand, if you have a lot of money saved up for a down payment, you may be able to afford a higher monthly payment.

 

There’s also the question of whether you should use a pre-tax or post-tax model when budgeting for your mortgage. The pre-tax model assumes that your monthly mortgage payment will be deducted from your paycheck before taxes are taken out, while the post-tax model assumes that your mortgage payment will be made with money that’s already been taxed. For most people, the post-tax model is a better way to go because it gives you a more accurate picture of how much money you actually have to work with each month.

 

Reach Out To Thrive Lending For More Information

 

So what’s the bottom line? How much of your income should go to a mortgage? Ultimately, it depends on a number of factors, including your income, debts, and down payment. But if you follow the 28% rule of thumb, you’ll likely be safe. And if you can swing a 20% down payment, even better! Get in touch with us today to learn more about how we can help you secure the best mortgage for your needs.