What Percentage of Your Gross Income Should Go Towards a Mortgage Payment?
There are common methods homeowners use to determine how much of their monthly income should be spent on the mortgage. Budgeting for a home is just as much about the mortgage payment as the purchase price. Mortgage payments typically include four expenses:
Principal: the original amount financed
Interest: the cost of borrowing money as displayed as a percentage
Taxes: your estimated annual property taxes, divided into 12 even monthly amounts
Insurance: your homeowner’s insurance premiums, divided into even monthly amounts; you may also have additional insurance premiums, depending on your loan term (for example, mortgage insurance premiums (PMI). If you can’t comfortably afford these payments with your income, you can create financial stress by stretching your budget too far. We want to avoid this.
Many homebuyers are unsure about how much income it takes to comfortably accommodate the mortgage payment. You need to have enough left over after paying the mortgage to cover other living expenses, savings and discretionary purchases. So it makes sense to base your mortgage budget on your individual income levels, designating a percentage of your income to the mortgage payment.
This is called the debt-to-income ratio (DTI).
The 28% 36% Rule
The 28% rule says you should keep your mortgage payment under 28% of your gross income (that’s your income before taxes are taken out).
For example, if all parties on the loan earned a combined gross income of $15,000 per month before taxes, you could multiply $15,000 by .28 to find that you should keep your mortgage payment under $4,200, according to this rule.
You could take this a step further with the 28/36 rule, which says that, in addition to keeping your mortgage under 28% of your gross income, you should keep all your debts under 36% of your income. Your other debts would include any student loans, car payments, credit cards and utilities due.
For example, with a gross income of $15,000 per month, you would want to keep all your monthly debt payments, including the mortgage, under $5,400 ($15,000 x .36 = $5,400) if you’re following this model.
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