What percentage of your income should go to mortgage

Quick insights

Your income is a significant factor in how much house you can afford. But what percentage of your income should go to your mortgage? Is there a “golden rule” or consensus about how much you should spend on a mortgage? While the answer is different for everyone, there are some general tips about what percentage of your income should go to a mortgage.

What is a mortgage payment?

A mortgage payment is the amount you pay your loan provider each month, including principal and interest. Sometimes, payments also include property or real estate taxes, increasing the amount you pay. Mortgage payments are typically made monthly, but there may be other schedules available, such as biweekly or semi-monthly payments. To get a better idea of what your monthly costs could be like, you can explore our mortgage calculator.

Mortgage to income ratio: Common rules

To determine how much you should spend on a mortgage every month, it’s generally recommended to start by understanding your income, financial goals and current debts.

Below are a few general rules of thumb to help you understand how much you can afford. While these mortgage rules can be a helpful starting point for determining a percentage of income for your mortgage, they’re general suggestions. It’s often helpful to consider your personal financial situation and goals. A qualified Home Lending Advisor can also provide more tailored guidance as to which mortgage options might be suitable for you and your financial needs.

The 28/36 rule

The 28/36 rule is a common guideline used to help loan providers determine how much home you can afford. It suggests spending no more than 28% of your gross monthly income on your mortgage payment. Meanwhile, your total monthly debt payments (car loans, credit cards and student loans) should stay below 36% of your gross monthly income.

Example: If you earn $6,000 per month, your total mortgage payment might be around $1,680, and your overall debt obligations could stay under $2,160.

The 35/45 rule

With the 35/45 model, your total monthly debt, including your mortgage payment, shouldn't exceed 35% of your pre-tax income or 45% of your after-tax income. To estimate your affordable range, multiply your gross income before taxes by 0.35 and your net income after taxes by 0.45. The amount you can afford falls between these two figures.

Example: Let’s say your monthly income is $10,000 before taxes and $8,000 after taxes:

According to the 35/45 model, you could potentially afford between $3,500 and $3,600 per month. The 35/45 mortgage rule generally allows for more of your income to go toward monthly mortgage payment than other similar rules.

The 25% post-tax rule

The 25% post-tax model suggests keeping your total monthly debt at or below 25% of your post-tax income. To calculate your affordable mortgage payment, multiply your post-tax monthly income by 0.25.

Example: If you earn $8,000 after taxes, you may be able to afford up to $2,000 for your monthly mortgage payment. This is generally considered a more conservative mortgage to income ratio than some other models.

How are mortgage payments determined?

There are several key factors that typically influence your mortgage payment and overall affordability. These include your income, debt-to-income (DTI) ratio, credit score, loan term, interest rate and the size of your down payment. Each of these elements plays a role in shaping how much you might pay each month and what price range could be comfortable for your budget.

Debt-to-income (DTI) ratio

Your DTI ratio compares your monthly debt payments to your gross monthly income. To calculate your DTI ratio, divide your total monthly debt (including mortgage payments, car loans, student loans and credit card balances) by your gross monthly income, then multiply by 100. A lower DTI ratio generally suggests you have more disposable income available to make mortgage payments, potentially improving your mortgage application.

Credit score

Your credit score represents your creditworthiness, based on factors including your payment history, credit utilization and length of your credit history. A higher credit score generally indicates lower lending risk, which can improve your chances of qualifying for a mortgage and securing more favorable terms. Note that minimum credit score requirements can vary, so it’s best to speak with your loan provider for more information.

Gross income

Gross income is the total amount of money you earn before taxes and other deductions. Lenders and mortgage loan providers consider your gross income, not your net income, when evaluating your ability to make monthly mortgage payments. A higher gross income generally indicates you can afford a more expensive home.

Work history

Your employment history can influence your mortgage affordability because it helps show loan providers the stability of your income. Having a consistent work record, usually two years or more in the same field, may demonstrate reliable earnings and make it easier to estimate how much you can comfortably afford each month. Gaps in employment or frequent job changes might require additional documentation to confirm your income stability.

Interest rates

Mortgage interest rates play a major role in determining the size of your mortgage payment. Even a small change in your rate could affect your monthly costs and overall loan affordability. Lower rates usually mean smaller payments over the life of the home loan, while higher interest rates increase your monthly obligations. Factors such as your credit score, loan type and broader market conditions may all influence the rate you receive.

How to lower your monthly mortgage payments

For most people, securing a lower mortgage payment is often a top concern. Here are some suggestions on how to do that:

Increase your credit score

To increase your credit score, it’s generally recommended to pay your bills on time, pay down existing debt and avoid opening new credit accounts unless necessary. Remember that closing unused credit accounts may negatively impact your credit score by increasing your credit utilization ratio.

Extend your loan term

Choosing a longer loan term, such as a 30-year mortgage instead of a 15-year mortgage, can lower your monthly payments by spreading the cost of your loan over a longer period. Keep in mind, however, that this will generally mean paying more interest over the life of the loan.

Make a larger down payment

Making a down payment of at least 20% can help you avoid private mortgage insurance (PMI) on a conventional loan, which is typically required for borrowers with lower down payments. Eliminating PMI can help reduce your monthly mortgage expenses. Additionally, a larger down payment means you’ll need to borrow less money — which may further reduce your monthly payments.

Request a home tax reassessment

If you already own a home or it's in escrow, consider filing for a reassessment with your county and requesting a hearing with the State Board of Equalization. Each county performs a tax assessment to determine how much your home or land is worth. A reassessment may lower your property taxes, potentially lowering your monthly mortgage payment too. Keep in mind that a reassessment could also result in a higher property valuation, increasing your property taxes. It’s generally recommended to research ahead of time and consult a qualified tax professional before seeking a reassessment.

Refinance your mortgage

If interest rates have dropped since you obtained your original mortgage, it may be worth considering a mortgage refinance.

While refinancing to a lower rate can lower your monthly payments, it might be wise to consider the costs associated with refinancing and whether the long-term savings outweigh these expenses. Like applying for a new mortgage, it’s recommended to improve your credit score before seeking a mortgage refinance.

Get rid of PMI

Private mortgage insurance (PMI) is generally required when your down payment is less than 20% of the home’s purchase price. Once your loan balance drops below 80% of your home’s original value, you may be able to request PMI removal, which could help lower your monthly mortgage payment. If the value of your home has increased since you purchased it, you might also qualify for early PMI removal through a new appraisal or refinancing.

In summary

So, what percentage of income should go to mortgage? Ultimately, it’s different for everyone and your ideal mortgage-income ratio will be dependent on the specifics of your financial situation. There are, however, a few mortgage rules of thumb you could consider to help you get started. It’s also helpful to speak with a Home Lending Advisor or use an online mortgage calculator to help you determine what percentage of your salary should go towards a mortgage loan.

Mortgage-to-income ratio FAQs

1. Do mortgage lenders use gross or net income?

Mortgage lenders and loan providers typically use your gross income when determining how much you can afford to borrow. Gross income is your total earnings before any taxes or deductions. This figure helps the company to evaluate key financial metrics, such as your debt-to-income ratio, to assess your ability to repay the loan.

2. Does mortgage interest reduce taxable income?

Yes, mortgage interest can potentially be used to reduce taxable income. Homeowners who itemize their deductions on their federal tax return may be able to deduct the interest paid on a mortgage. This deduction may apply to mortgages on a primary residence and, in some cases, a second home. However, there are limits and eligibility criteria, so it’s generally recommended to consult with a tax professional for specific guidance.

3. Does the length of the home loan term impact the mortgage-to-income ratio?

Yes, the length of the home loan term does impact the mortgage-to-income ratio. Longer loan terms, like a 30-year mortgage, typically have lower monthly payments, which can result in a lower mortgage-to-income ratio. Conversely, shorter loan terms, like a 15-year mortgage, often have higher monthly payments, leading to a higher mortgage-to-income ratio.

4. What other factors should I consider when determining how much my mortgage should be?

To help determine an appropriate amount for your routine mortgage payments, you’ll generally want to consider factors like your current debts, overarching financial goals, your total savings, expected income changes and current living expenses. A qualified home lending advisor can provide more personalized guidance to help you find a mortgage that fits.

5. What are the risks of allocating too much income to mortgage?

Allocating too much income to a mortgage often causes financial strain, limits flexibility, and may lead to new debt. This over allocation of income toward a mortgage is sometimes called “house poor.” Higher payments leave less for other expenses and emergencies, potentially resulting in further borrowing and additional stress.