Percentage of Income for Mortgage: Your Complete Guide

Did you know that 28% of your income is the magic number for homeownership? But what happens if you stretch that to 36% or beyond? Understanding the percentage of income for a mortgage can make or break your financial future.

With housing prices soaring 5.7% over the past year, knowing how much of your income should go to a mortgage is no longer optional. It’s essential for making smart decisions.

If you regret your mortgage payment every month, understanding the right percentage of income to allocate for housing could save you from future stress.

Homebuyers who ignore income-to-mortgage ratios often end up overpaying or become house-poor. Learn the rules of mortgage payments before you commit a financial mistake.

Let’s clarify the numbers to help you make a confident choice regarding mortgage affordability.‍

Determining how much of your income you should allocate towards your mortgage is one of the toughest questions to answer.

You need a balanced mortgage-to-income ratio that makes you stay safe financially and sets the foundation for long-term wealth building.

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Why Is It Important?

Your mortgage is one of the largest recurring expenses in your expenses. When you overcommit to these payments it can lead to:

• Financial strain
• Limit your ability to save for your future
• Make you unable to cover your unexpected expenses

But on the flipside allocating too little of your income towards a mortgage can restrict your ability to purchase a home.

All you need to have is the right balance between:

• Established guidelines
• Market Conditions
• Your financial situation‍

Wondering what percentage of income should go to the mortgage? Below are the key metrics for affording your mortgage:

This rule means that your total monthly housing expenses like principal, interest, taxes, and insurance(PITI) should not go over 28% of your gross monthly income.

Why is it important: Because when you stay within this limit it ensures that you comfortably manage your mortgage without compromising other financial goals.

Example: If your gross monthly income is $6,000, your total housing expenses should not exceed $1,680.‍

This rule states that your monthly debt obligation (including your mortgage, credit cards, student loans, etc.) should not exceed 36% of your monthly gross income.

Why is it important: This rule provides you with a more holistic view of your financial health as it accounts for all your debts.

Example: With a gross monthly income of $6,000, your total debt payments should be no more than $2,160.‍

If you go beyond a certain threshold of 43% of your debt-to-income ratio then it can be challenging to secure a loan. As lenders, this 43% is the upper limit to determine your mortgage eligibility. 

Why is it important: This is important because if you stay below the 43% cap of your DTI, it’ll be easier to get a mortgage.

Example: For a gross monthly income of $6,000, your maximum total debt payments (including the mortgage) should be $2,580.‍

This rule states that your housing expenses should not exceed 25% of your take-home pay after taxes for added financial security.

Why is it important: This model accounts for actual cash flow and ensures you have plenty of room for savings and discretionary spending.

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Here’s how these metrics impact your financial health:

1. Avoiding "House Poor" Syndrome: Following the guidelines presented above helps you avoid being house-poor. Being “house poor” means a situation where most of your income is spent on housing expenses, leaving you no room to save for retirement, emergencies, or any leisurely activity.
2. Preparing for Unexpected Expenses: There are many surprising costs when it comes to homeownership. It can be appliance repairs, increasing property taxes, or rising utility bills. When you keep your mortgage within its limits, it makes it easier to pay for these expenses.
3. Improving Loan Approval Odds: Staying within the limits presented above also makes it easier to get loan approvals, and secure a better mortgage at a lesser interest rate which saves you a ton of money in the future.‍

Here’s a quick cheat sheet: