What percentage of my income should go towards a mortgage? – Forbes Advisor

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When buying a home, your income plays a big part in how much home you can afford. You must have sufficient income to prove to the lender that you can make your mortgage payments on time.

There are various rules and standards that must be followed, but there is no one-size-fits-all approach when it comes to how much of your income should go toward a mortgage payment. Here’s what to consider before deciding which method is right for you.

How much of your income should go towards the mortgage?

There are a few different more popular models for determining how much of your income should go towards your mortgage.

The 28% rule

The 28% rule states that you shouldn’t be paying more than 28% of your gross monthly income on mortgage payments — including taxes and home insurance. Gross income is what you earn before taxes are deducted.

example: Suppose you earn $7,000 gross household income each month. Multiply that by 28% and that’s roughly what you can spend each month on your monthly mortgage payment. So, with a gross income of $7,000, your monthly home payment should be around $1,960 using the 28% model.

The 28/36 model

The 28/36 rule is a complement to the 28% rule: 28% of your income goes towards your mortgage payment and 36% towards all of your other household debts. This includes credit cards, car loans, utility payments, and any other debt you may have.

example: With a gross income of $7,000, 36% would be $2,520. Along with your $1,960 mortgage payment, you have $2,520 left to cover other needs.

The 35/45 model

With the 35/45 method, your total debt, including your mortgage payment, should account for no more than 35% of your gross household income. However, another way to calculate it is that no more than 45% of your net salary — or after-tax dollars — should account for your total monthly debt.

example: With a gross monthly income of $7,000, 35% of your total debt would be $2,450. But let’s say after taxes, insurance, and other deductions, your net pay is $6,000. Multiply that by 45% and that’s $2,700. So your range (for all your debt) would be between $2,450 and $2,700.

The 25% post-tax model

While some other rules use your gross income as a starting point, this one uses your net income for calculations. It states that 25% of your after-tax income goes toward your home payment.

With this model, you can plan the least amount of money for your home payment. If you are looking for a home soon but have a lot of outstanding debts such as For example, a car payment, student loan, or credit card, this method may be best for you so you don’t bite off more than you can chew.

example: So if your net income is $6,000 a month, your monthly mortgage payment shouldn’t exceed $1,500.

This is how you determine how much house you can afford

Most people use a mortgage to buy a home, but everyone’s income and expenses are different. Because of this, you should calculate your potential monthly payment based on your current financial situation. You need to calculate some numbers like:

  • income: This is how much you earn monthly with your regular job and your side hustles. Make sure you have gross and net numbers ready. You can find this on your most recent payslip. If your income fluctuates, refer to your most recent tax return.
  • debts: Debt consists of what you currently owe money for. This includes things like credit cards, student loans, car loans, personal loans, and other types of debt. Debt is not the same as expenses, which can fluctuate from month to month (like groceries and gas).
  • down payment: This is how much cash you pay up front for the cost of a home. A 20% down payment can deduct personal mortgage insurance (PMI) fees from your monthly expenses, but it’s not always necessary to buy a home. However, the higher your down payment, the lower your monthly mortgage payment will be.
  • credit-worthiness: Good or excellent credit means you are getting the lowest available interest rate offered by lenders. A high interest rate usually means a higher monthly payment.

How lenders decide how much you can afford

Lenders use a few different factors to see how much house you can afford. You use your debt-to-income ratio, or DTI, to make sure you can comfortably pay your mortgage, as well as your other debts. This includes credit cards, car loans, student loan payments, and more.

You can calculate your DTI ratio by adding up all of your debt payments and dividing by your gross monthly income. Let’s say your monthly income is $7,000, your car payment is $400, your student loan is $200, your credit card payment is $500, and your current housing payment is $1,700. All of this together costs $2,800. So your DTI ratio is 40% since $2,800 is 40% of $7,000.

In general, a good DTI to aim for is between 36% and 43%. Some lenders will go higher, but the lower your DTI, the more likely you are to be pre-approved for a mortgage. However, different lenders have different DTI requirements, so compare multiple mortgage lenders to find one that works for you.

How to lower your monthly mortgage payment

Your monthly mortgage payment will make up a good chunk of your total debt, so anything you can do to lower that payment can help. Consider some options like:

  • Find a cheaper house. While your lender may allow you a loan up to a certain amount, you don’t necessarily have to buy a home for the full amount. The lower the house price, the lower your monthly payments will be.
  • Increase your deposit. The higher your down payment, the lower your monthly rate. So if you can, save up so you can secure that lower payment.
  • Get a lower interest rate. Most of the time, your interest rate is based on your credit score and DTI. Try to pay off any outstanding debt, such as a credit card, car loan, or student loan. Not only does this lower your DTI, but it could also improve your credit score. A higher credit score means you may get a lower interest rate from your lender.

Other home buying expenses to consider

Buying a home is typically the most expensive purchase a person will make in their lifetime. Additionally, other small fees can really add up that can increase the overall cost of that purchase. They’re also on the hook for other costs, such as:

  • routine maintenance: You need to maintain your home. And sometimes that means ongoing maintenance for extras like a pool. In addition to regular maintenance of the pool, there is also the patio or deck where the pool is located that needs a pressure cleaning, for example, annually.
  • lawn care: Unless your municipality pays a lawn care team, you are on your own for all lawn and hedge maintenance. This means hiring a company to do it for you or buying the right tools to do it yourself.
  • DIY work and repairs: This can be anything from a new garage door to replacing kitchen cabinet handles. It could also be a new toilet or a new roof.

When you’re on the hunt for a home, a completed inspection report will let you know any key concerns to look out for. If some items are out of date, you can use them as negotiation tools to lower the cost of the home price or have new items installed before you buy.

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