What Percentage of Your Income Should Go Toward a Mortgage?

Purchasing a home is one of the biggest financial decisions you can make. Therefore, determining how much you can afford to pay each month while leaving enough for living expenses and savings is essential.

Balancing your income, monthly mortgage payments, and financial needs provides peace of mind. Living comfortably while saving for the future creates financial security.

Most lenders consider the following models and ratios when determining the percentage of a borrower’s income that should go toward a mortgage. Understanding these models and ratios can help you prepare for securing a mortgage.

28% Model

The 28% model states that a homebuyer’s monthly mortgage payment, including principal, interest, taxes, and insurance, shouldn’t exceed 28% of their gross monthly income. This cap is based on the borrower’s front-end debt-to-income (DTI) ratio, the monthly pre-tax income used for a mortgage payment.

Historical lending data indicate that borrowers who maintain housing costs at or below 28% of their gross monthly income are likely to manage their mortgage payments while maintaining financial stability for other necessities and savings. For instance, if a borrower earns $5,000 monthly, their maximum monthly mortgage payment should be $1,400. ($5,000 x 0.28 = $1,400)

36% Model

The 36% model, involving a borrower’s back-end DTI ratio, includes their total debt load, such as credit cards, car loans, and student loans. Lenders prefer that no more than 36% of a borrower’s gross income be used for debt payments, including a mortgage. 

For instance, a borrower with a $5,000 monthly income and a $1,400 monthly mortgage payment should have no more than $400 in other monthly debt payments. ($5,000 x 0.36 = $1,800 maximum monthly debt obligations; $1,800 - $1,400 = $400)

43% Debt-to-Income Ratio

Some mortgage lenders allow up to a 43% DTI ratio for borrowers with a strong credit score and substantial cash reserves. Qualified mortgages are included at this level, meaning the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac) can purchase them from lenders, package them into mortgage-backed securities, and sell them to investors, creating liquidity in the housing market.

For instance, a borrower with a $5,000 monthly income could have a maximum monthly debt obligation, including mortgage payment, of $2,150 ($5,000 x 0.43 = $2,150). However, a lower DTI ratio increased the odds of getting approved for a mortgage.

25% Post-Tax Model

Many experts recommend borrowers not spend more than 25% of their after-tax income on monthly mortgage payments. For instance, a borrower who earns $5,000 monthly but receives $4,000 in their paycheck should spend no more than $1,000 on monthly mortgage payments ($4,000 x 0.25 = $1,000). This net income model is especially effective for borrowers whose take-home pay is affected by wage garnishment or aggressive retirement savings.

*This information is for educational purposes only.