Having lived in several states, owning primary residences and investment properties, Josh Patoka uses his experience using mortgages and HELOCs to help first-time home buyers and home owners find the best home loan for their financial goals. His work.
Josh Patoka Mortgages WriterHaving lived in several states, owning primary residences and investment properties, Josh Patoka uses his experience using mortgages and HELOCs to help first-time home buyers and home owners find the best home loan for their financial goals. His work.
Written By Josh Patoka Mortgages WriterHaving lived in several states, owning primary residences and investment properties, Josh Patoka uses his experience using mortgages and HELOCs to help first-time home buyers and home owners find the best home loan for their financial goals. His work.
Josh Patoka Mortgages WriterHaving lived in several states, owning primary residences and investment properties, Josh Patoka uses his experience using mortgages and HELOCs to help first-time home buyers and home owners find the best home loan for their financial goals. His work.
Mortgages Writer Chris Jennings Loans & Mortgages EditorChris Jennings is a writer and editor with more than seven years of experience in the personal finance and mortgage space. He enjoys simplifying complex mortgage topics for first-time homebuyers and homeowners alike. His work has been featured in a n.
Chris Jennings Loans & Mortgages EditorChris Jennings is a writer and editor with more than seven years of experience in the personal finance and mortgage space. He enjoys simplifying complex mortgage topics for first-time homebuyers and homeowners alike. His work has been featured in a n.
Chris Jennings Loans & Mortgages EditorChris Jennings is a writer and editor with more than seven years of experience in the personal finance and mortgage space. He enjoys simplifying complex mortgage topics for first-time homebuyers and homeowners alike. His work has been featured in a n.
Chris Jennings Loans & Mortgages EditorChris Jennings is a writer and editor with more than seven years of experience in the personal finance and mortgage space. He enjoys simplifying complex mortgage topics for first-time homebuyers and homeowners alike. His work has been featured in a n.
| Loans & Mortgages Editor
Updated: Jun 27, 2023, 4:14pm
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When buying a home, your earnings play a major part in determining how much home you can afford. You’ll need to have sufficient 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’s no one-size-fits-all method when it comes to how much of your income should go to a mortgage payment. Here’s what to consider before deciding which method works for you.
There are a few different more popular models for determining how much of your income should go to your mortgage.
The 28% rule says that you shouldn’t pay more than 28% of your monthly gross income on mortgage payments—including taxes and homeowner’s insurance. Gross income is what you make before taxes are taken out.
Example: Let’s say you earn $7,000 every month in gross household income. Multiply that by 28% and that’s about what you can expect to spend on your monthly mortgage payment every month. So with a $7,000 gross income, your monthly home payment should be about $1,960 using the 28% model.
The 28/36 rule is an addendum to the 28% rule: 28% of your income will go to your mortgage payment and 36% to all your other household debt. This includes credit cards, car loans, utility payments and any other debt you might have.
Example: With a $7,000 gross income, 36% would be $2,520. Along with your $1,960 mortgage payment, you’re left with $2,520 to cover other needs.
Using the 35/45 method, no more than 35% of your gross household income should go to all your debt, including your mortgage payment. Another way to calculate, though, is no more than 45% of your net pay—or after-tax dollars—should go to your total monthly debt.
Example: With a $7,000 monthly gross income, 35% would be $2,450 for all your debt. But let’s say after taxes, insurance and other deductions, your take-home pay is $6,000. Multiply that by 45% and that’s $2,700. So your range (for all your debt) would be between $2,450 and $2,700.
While some other rules use your gross income as a starter, this one uses your net income for calculations. It says that 25% of your income after taxes will go to your home payment.
This model gives you the least amount of money to put towards your home payment. If you’re looking for a home soon but have a lot of outstanding debt, like a car payment, student loans or credit cards, this method might be best for you so you don’t bite off more than you can chew.
Example: So if your take-home pay is $6,000 a month, your monthly mortgage payment shouldn’t exceed $1,500.
Most people use a mortgage to buy a home, but everyone’s income and expenses are different. Because of this, you’ll want to calculate your potential monthly payment based on your current financial situation. You’ll need to calculate some figures like:
Lenders use a few different factors to see how much home you can afford. They use your debt-to-income ratio, or DTI, to make sure you can comfortably pay your mortgage as well as your other debt. 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. 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 home payment is $1,700. All 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. Different lenders have different DTI requirements, though, so compare multiple mortgage lenders to find one that works for you.
Your monthly mortgage payment is going to take up a good chunk of your overall debt, so anything you can do to lower that payment can help. Consider some options, like:
Kevin Estes, an hourly financial planner and founder of Scaled Finance, suggests that you exceed the minimum credit, income and cash requirements when possible. Estes also recommends getting quotes from at least two lenders.
When purchasing a personal residence, he and his wife worked with two lenders to get a better rate. “In the ensuing bidding war, we negotiated everything—interest rates, closing costs, points, lender credits and even prepaid expenses.”
Ultimately, the Estes family was able to negotiate a 0.25% rate discount and didn’t have to pay discount points the lender originally required.
Check your rates today with Better Mortgage.
Buying a home is typically the most expensive purchase someone makes in their lifetime. On top of that, other small fees can really add up that can increase the total cost of that purchase. You’re also on the hook for other costs, like:
When you’re on the hunt for a home, a completed inspection report will let you know any major concerns to pay attention to. If some items are out of date, you could use those as negotiating tools to lower the cost of the home price or get new ones installed before purchasing.
Forbes Advisor Loans Writer Dori Zinn contributed to this article.
Most lenders encourage having a DTI of at least 43% or lower; a DTI below 36% is ideal. That said, it’s possible to qualify with a DTI as high as 50% with some lenders, although you’ll be eligible for fewer programs.
Lenders suggest allocating no more than 30% of your pre-tax income to your mortgage payment so that you can more comfortably afford your principal, interest, taxes and insurance-related housing costs. Exceeding the 30% threshold can be acceptable if you have minimal or no consumer debt such as auto loans or credit card debt.
Depending on the lender and loan program, typically up to 43% of your gross income can be allocated to existing debt payments. It’s possible to qualify with a higher DTI ratio although you may need a higher credit score, down payment or more cash reserves.
A joint mortgage combines two individuals’ incomes, which can reduce your overall DTI ratio. At the same time, the co-applicant should have minimal debt to gain the biggest financial advantage.
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