How to Budget Your Income for a Mortgage: Key Percentage Guidelines

When you’re ready to purchase a home, lenders will scrutinize one critical factor: how much of your earnings can realistically go toward housing costs. Your income directly determines your borrowing capacity, but it’s not just about what you make—it’s about balancing your mortgage payment with all your other financial obligations. Multiple financial models exist to help you understand what portion of your income should go to mortgage-related expenses, each with different implications for your overall financial health.

Understanding the Income-to-Mortgage Ratio Standards

The financial industry has developed several benchmark standards to ensure homebuyers don’t overextend themselves. These ratios serve as guardrails that lenders use, and they’re worth understanding before you start shopping for a home.

The 28% Threshold Model

One foundational approach suggests that your total housing costs—including mortgage principal, interest, taxes, and homeowner’s insurance—should not exceed 28% of your gross monthly income (your earnings before taxes). This model gives you a straightforward calculation: if you earn $7,000 monthly in gross income, your housing payment should stay around $1,960.

The logic here is simple: lenders want to ensure you have sufficient resources remaining for other essential expenses and debt obligations after paying your mortgage.

The 28/36 Expanded Approach

Building on the 28% foundation, this dual-ratio model adds another layer. While 28% covers your housing costs, the remaining 8% creates a buffer for your other debt—credit cards, car loans, student loans, utilities, and miscellaneous obligations. Using the same $7,000 monthly income example, you’d allocate roughly $1,960 to housing and have approximately $2,520 available for all other debt combined.

This method acknowledges the reality that most homebuyers juggle multiple financial responsibilities simultaneously.

The 35/45 Flexible Range Method

This approach offers more flexibility for borrowers with complex financial situations. It establishes that either 35% of your gross income or 45% of your after-tax income can go toward all debt obligations (including your mortgage). Using our $7,000 example: 35% of gross income equals $2,450, while 45% of an estimated $6,000 take-home pay equals $2,700—giving you a range of $2,450 to $2,700 for total monthly debt.

This model works well if your financial picture is more complicated or if you need slightly more breathing room.

The 25% Post-Tax Conservative Approach

If you’re heavily burdened by existing debt or prefer maximum financial cushioning, this model uses your actual take-home pay rather than gross income. Only 25% of your net earnings should go toward housing costs. With $6,000 in monthly after-tax income, your mortgage payment ceiling would be $1,500.

This is the most restrictive model but offers the greatest financial security. It’s particularly relevant if you’re juggling student loans, car payments, or substantial credit card balances.

Calculating What You Can Realistically Afford

Rather than relying solely on a single percentage rule, successful home buyers assess their complete financial picture. To do this accurately, you’ll need to gather specific information:

• Your actual income: Document both gross earnings (before taxes) and net take-home pay. Include not just salary but also any side income you consistently earn. Your recent pay stubs provide gross numbers; your tax returns help verify annual totals if you have variable income.

• Your existing debt obligations: List everything you owe monthly—credit cards, student loans, car payments, personal loans, and any other recurring debt. This differs from variable expenses like groceries or gas.

• Your down payment capacity: How much can you save for an upfront payment? A 20% down payment typically eliminates private mortgage insurance (PMI) from your monthly costs, but any down payment reduces your monthly obligation. The more you put down, the lower your monthly payment.

• Your credit standing: Your credit score directly influences the interest rate lenders offer you. Higher scores unlock lower rates; lower scores mean higher rates and consequently higher monthly payments.

Once you’ve compiled these figures, you can run them through your preferred income-to-mortgage model to identify your comfortable range.

How Lending Institutions Evaluate Your Capacity

Lenders rely heavily on your debt-to-income ratio (DTI)—calculated by dividing your total monthly debt payments by your gross monthly income—to approve or deny mortgage applications.

Here’s a practical example: If your gross monthly income is $7,000, and your monthly obligations total $2,800 (including a $400 car payment, $200 student loan payment, $500 credit card payment, and a $1,700 proposed mortgage payment), your DTI would be 40% ($2,800 ÷ $7,000).

Most lenders prefer DTI ratios between 36% and 43%. While some aggressive lenders will stretch beyond 43%, a lower DTI strengthens your pre-approval odds. Since DTI requirements vary significantly between lenders, comparing multiple mortgage providers helps you find terms aligned with your financial profile.

Optimizing Your Monthly Payment Downward

Your mortgage will likely be your largest monthly expense, so exploring ways to reduce it makes financial sense:

• Target a less expensive property: Just because a lender approves you for a specific loan amount doesn’t mean you must use the full approval. Selecting a lower-priced home directly lowers your monthly obligation.

• Increase your initial down payment: Save aggressively to put more money down upfront. Each additional dollar reduces your loan amount and thus your monthly payment.

• Secure a lower interest rate: Your rate depends partly on your credit score and DTI. Paying down existing debt—especially high-interest credit cards and personal loans—can improve your credit profile and lower your DTI simultaneously. This dual benefit often translates to a lower interest rate from your lender.

Planning for Costs Beyond the Monthly Payment

The monthly mortgage payment represents only part of homeownership’s financial reality. Once you own property, additional expenses accumulate:

• Ongoing maintenance: Homes require consistent upkeep. If you have a pool or deck, factor in annual maintenance costs like pressure washing or repairs.

• Landscaping and lawn care: Unless your community provides this service, you’re responsible for lawn maintenance, either by hiring a service or purchasing equipment and handling it yourself.

• Repairs and improvements: Eventually you’ll face unexpected expenses—a new roof, plumbing repairs, updated kitchen fixtures, or other improvements. A pre-purchase home inspection can identify major concerns you might negotiate into the purchase price or request be fixed before closing.

Understanding that your income-to-mortgage ratio is just one piece of the homeownership puzzle helps you approach the purchase decision more comprehensively. Choose the ratio model that aligns with your risk tolerance and financial obligations, then budget deliberately for the full scope of homeownership costs.