When you buy a home, it’s important to know how much of your income you can reasonably dedicate to your monthly mortgage payment. Knowing this can mean the difference between living comfortably and meeting other financial priorities or being “house poor” and struggling to make ends meet.

What percentage of income should go to a mortgage?

Every borrower’s situation is different, but there are at least two schools of thought on how much of your gross income should be allocated to your mortgage: 28 percent and 36 percent.

28% rule

The 28 percent rule, which specifies that no more than 28 percent of your gross income should be spent on your monthly mortgage payment, is a threshold many lenders adhere to, explains Corey Winograd, loan officer and managing director of East Coast Capital Corp., which has offices in New York and Florida.

“Most lenders follow the guideline that a borrower’s housing payment (including principal, interest, taxes and insurance) should not be higher than 28 percent of their pre-tax monthly gross income,” says Winograd. “Historically, borrowers who are within the 28 percent threshold generally have been able to comfortably make their monthly housing payments.”

This 28 percent cap centers on what’s known as the front-end ratio, or the borrower’s total housing costs compared to their income.

36% rule

The 36 percent model is another way to determine how much of your gross income should go towards your mortgage, and can be used in conjunction with the 28 percent rule. With this method, no more than 36 percent of your gross monthly income should be allocated to your debt, including your mortgage and other obligations like auto or student loans and credit card payments. This percentage is known as the back-end ratio or your debt-to-income (DTI) ratio.

“Most responsible lenders follow a 36 percent back-end DTI ratio model, unless there are compensating factors,” Winograd says.

Note that there are maximum DTI ratios set by Fannie Mae, Freddie Mac and the FHA that lenders use in underwriting, as well. For conventional loans, the maximum can range from 43 percent to 45 percent (and sometimes higher). For FHA loans, it’s generally 43 percent, but also can go higher.

Based on the 28 percent and 36 percent models, here’s a budgeting example assuming the borrower has a monthly income of $5,000.

  • $5,000 x 0.28 (28%) = $1,400 (Maximum mortgage payment)
  • $5,000 x 0.36 (36%) = $1,800 (Maximum debt obligation including mortgage payment)

Going by the 28 percent rule, the borrower should be able to reasonably afford a $1,400 mortgage payment. However, factoring in the 36 percent rule, the borrower would also only have room to devote $400 to their remaining debt obligations. Applied to your own financial situation, this may or may not be feasible for you.

43% DTI ratio

While mortgage lenders prefer your DTI ratio not exceed 36 percent, in many cases, lenders can accept a maximum of 43 percent — this is still within the range of what’s known as a “qualified mortgage.” That upper limit might even go higher depending on lender.

Overall, though, the lower your DTI ratio, the higher your chances of getting approved for a mortgage, since too much debt can heighten the risk of default. The Consumer Financial Protection Bureau reports that borrowers with higher DTI ratios are much more likely to have difficulty keeping up with monthly mortgage payments.

25% post-tax model

The 25 percent post-tax model is another way to consider your debt load and what you can afford. With this model, no more than 25 percent of your after-tax income goes toward your monthly mortgage payments. For example, if your monthly take-home pay (after taxes) is $6,000, that means up to $1,500 can be spent on your mortgage payment.

This might be a viable model to go by if you have other types of debt, such as personal loans, a car loan, credit card debt or student loans.

How do lenders determine what I can afford?

These are the major factors mortgage lenders weigh to determine how much mortgage a borrower can reasonably afford:

  • Gross income – Your gross income is your total earnings before taxes and other deductions are factored in. Other sources of income, such as spousal support, a pension or rental income, are also included in gross income.
  • DTI ratio – Your DTI ratio is your total monthly debt obligations divided by your total gross income.
  • Credit score – Your credit score is a major factor lenders look at when evaluating how much you can afford. In general, the higher your credit score, the lower your interest rate, which impacts how much you can feasibly spend on a home.
  • Work history – Lenders look for a stable source of income to ensure you can repay your mortgage. When you apply for a loan, you’ll be asked to provide evidence of employment (such as a pay stub) from at least the past two years. If you work for yourself, you’ll be asked to provide tax returns and other business records.

Other considerations for what you can afford

Costs of homeownership

As any homeowner can attest, the expenses of owning and maintaining a home can add up well beyond the monthly cost of a mortgage.

“HOA fees, utility payments and other expenses must be factored into the affordability calculation,”  Winograd says.

These other costs can include:

  • Home maintenance, including a fund for future replacement of things that wear out over time such as appliances, the roof and HVAC system
  • Pest prevention
  • Security

Mortgage type

The kind of mortgage you choose can also have a significant impact on what you can afford. To find a loan that’s right for you, it’s important to explore all your options, including conventional, FHA and VA loans. It’s also smart to find a mortgage lender that understands your financial situation, needs and goals.

“An effective loan officer will spend the time to learn about a client’s current and future financial picture to determine a suitable loan product, loan amount and loan terms,” Winograd says.

Bottom line

You can work with your lender to do the affordability calculations based on your income and the cost of the home you have in mind, and from there, evaluate whether you can reasonably afford it. Remember that when it comes to estimating what you can afford, there are guidelines you can follow, but ultimately it’ll be based on your individual circumstances.

“There is no hard and fast rule because every borrower has a different story, a unique credit profile and varying debt obligations, all of which must inform the decision regarding the percentage of gross monthly income available for a housing payment,” Winograd says.