Deciding What Percentage of Your Earnings Should Go to Your Mortgage

When you’re planning to buy a home, one of the most critical questions isn’t just about the property itself—it’s about whether the monthly mortgage payment fits comfortably within your budget. Your income level directly impacts not only how much house a lender will approve you for, but also how much house you should realistically purchase. Rather than a one-size-fits-all approach, financial experts have developed several models to help buyers determine an appropriate percentage of monthly income should go to mortgage payments.

Understanding the Main Income-to-Mortgage Models

Different lending standards and financial advisors recommend various approaches, each suited to different financial situations. The most widely discussed benchmarks focus on the relationship between your housing costs and overall income.

The 28% Earning Approach

The most conservative guideline suggests you shouldn’t commit more than 28% of your monthly gross earnings toward housing costs. This percentage includes not only the mortgage itself, but also property taxes and homeowner’s insurance bundled into a single monthly payment.

To illustrate: if your household brings in $7,000 monthly before taxes, you’d calculate 28% of that amount, which equals approximately $1,960. This becomes your target monthly housing budget.

The 28/36 Framework

Building on the 28% model, this framework adds another layer of financial management. While 28% goes toward housing, the remaining debt obligations—credit cards, vehicle loans, utility payments, and other liabilities—should stay within 36% of your gross monthly income.

Using the same $7,000 example, you’d have $2,520 available (36% of income) for all other debt payments beyond your $1,960 mortgage, leaving room to manage your broader financial obligations.

Alternative Approaches: The 35/45 and Post-Tax Models

Some lenders apply stricter standards. The 35/45 model caps all household debt—including your mortgage—at 35% of gross income, or alternatively, 45% of your take-home (after-tax) pay. This approach tends to be more restrictive.

Another option prioritizes your actual spending power by using your net income instead of gross figures. The 25% post-tax model restricts housing costs to just 25% of what you actually take home after deductions. While this approach provides the least lending flexibility, it may suit borrowers who already carry substantial obligations like car payments, student loans, or credit card debt.

Key Financial Factors That Lenders Assess

Lenders don’t simply approve loans based on income percentages alone. They examine your complete financial picture through several critical metrics.

Your debt-to-income ratio (DTI) represents all your monthly debt obligations divided by your gross monthly income. For example, if you earn $7,000 monthly and carry $2,800 in total monthly debt payments (including a potential new mortgage), your DTI would be 40%. Most lenders prefer to see DTI between 36% and 43%, though some will stretch higher depending on your credit profile.

Beyond the ratio, lenders evaluate your:

• Income stability: They want consistent earnings history, reviewing both recent pay stubs and tax returns if you’re self-employed
• Credit standing: A stronger credit score typically unlocks lower interest rates, directly reducing your monthly payment obligation
• Down payment amount: A larger upfront investment means a smaller loan and consequently lower monthly payments
• Existing debt load: Higher existing obligations reduce how much additional mortgage debt lenders will extend

Calculating What You Can Actually Afford

Rather than simply applying a percentage rule, take inventory of your specific situation. Gather these numbers:

Your monthly income from employment and side income sources (both before-tax and after-tax figures)

Your total monthly obligations: credit card minimums, auto loans, student loan payments, personal loans, and any other recurring debt

Your available down payment: funds you can commit upfront to reduce the mortgage amount

Your credit situation: whether you’re positioning yourself for prime lending rates or working to improve your profile

The percentage model you ultimately use should reflect your personal financial reality. Someone carrying minimal existing debt might comfortably operate at the 28/36 level, while someone with substantial other obligations might need the 25% post-tax approach to maintain genuine financial comfort.

Strategies to Keep Your Housing Payment Manageable

Your mortgage will likely represent your largest monthly expense, so optimizing this number matters significantly.

Adjust your home search parameters: You don’t need to purchase at the maximum price lenders approve. Selecting a less expensive property directly translates to lower monthly payments.

Increase your down payment: Saving additional funds to put down means financing less money, which reduces your monthly obligation and may eliminate private mortgage insurance costs.

Improve your financial profile before applying: Paying down existing debt improves both your DTI ratio and credit score, potentially qualifying you for lower interest rates from lenders. Even modest rate reductions compound into meaningful monthly savings.

The Complete Cost of Home Ownership

Your mortgage payment represents just one piece of the homeownership expense puzzle. Factor in these often-overlooked costs when evaluating your budget:

Maintenance and repairs: Every home requires ongoing upkeep, from seasonal maintenance to unexpected repairs. Budget for roof replacements, HVAC servicing, plumbing issues, and general wear-and-tear.

Lawn and landscaping: Unless your community covers these services, you’re responsible for lawn care, landscaping maintenance, and seasonal cleanup.

Property improvements: Beyond essential repairs, you may want upgrades like new appliances, bathroom renovations, or outdoor enhancements. When reviewing home inspections, use identified issues as negotiation points to reduce your purchase price.

Utilities and services: Monthly bills for electricity, water, internet, and potentially pool maintenance add to your regular housing costs.

Understanding the full scope of ownership expenses helps you select a mortgage percentage that leaves room in your budget for these inevitable costs. Your housing payment percentage matters, but so does your ability to manage the complete financial picture of home ownership.