How Far Will Your Salary Get You When Buying a House?

What Percentage of Your Income Should Your Mortgage Be?

For most homebuyers, home affordability comes down to a few primary factors: your income, your existing debt and other expenses.

Although many lenders set limits based on these variables—more on those in a minute—there are some rules of thumb you can use to determine the perfect number for your budget. That means a mortgage payment that gets you into a house you want but also won’t break the bank.

28% Rule

This rule states that your monthly housing payment, including principal, interest, taxes and insurance, should equal no more than 28% of your gross monthly income.

So, if your salary is $100,000 per year, you’d divide that by 12 to get a gross monthly income of roughly $8,333. Then, you’d multiply that by 0.28, giving you a maximum mortgage payment of about $2,333.

28/36 Rule

With the 28/36 rule, you’re taking the 28% rule one step further to maintain a healthy level of debt overall. In addition to keeping your mortgage payment at or below 28%, you’ll also try to keep all of your debt payments at or below 36% of your gross monthly income.

Taking the previous example, you’d multiply your gross monthly income by 0.36 to get a cap of approximately $3,000 on all debt payments. So, if you have $1,000 in monthly payments on student loans, auto loans and credit cards, your mortgage payment should be no more than $2,000.

35/45 Rule

Rather than separating your mortgage payment from other debt payments, the 35/45 rule lumps them all together. With this rule of thumb, you’ll keep your total monthly debt obligations at or below 35% of your gross monthly income or 45% of your after-tax income.

What you can afford will be somewhere between those two figures. So, if your gross monthly income is $8,333, and your take-home pay is $7,000, you’d multiply $8,333 by 0.35 to get $2,917. Then, you’d multiply $7,000 by 0.45 to get $3,150 to complete your target range.

25% Post-Tax Rule

This conservative approach dictates that your mortgage payment should be no more than 25% of your after-tax income. With a take-home pay of $7,000, for instance, your maximum housing payment would be $1,750.

You may consider this option if you’re dealing with significant debt in other areas or you have very aggressive savings goals.

How Do Lenders Determine Your Mortgage Payment?

Each lender has its own criteria for deciding how much you can borrow with a new mortgage loan. With a conventional loan—the most popular type of mortgage loan—many lenders may allow your mortgage payment to be as high as 45% of your gross monthly income.

However, your limit will likely be determined based on your other debts, your down payment amount and other factors that mortgage lenders consider when you apply. If you’re interested in finding out what you can afford, get prequalified with a mortgage lender or broker to get more details for your situation.

How to Lower Your Monthly Mortgage Payments

If your proposed mortgage payment is too high—either for the lender’s standards or your budget—here are some steps you can take to lower the payment amount.

Put More Money Down

Depending on the type of mortgage program you’re using, you may not even be required to put anything down. However, a down payment can reduce your monthly costs by lowering the amount of money you’re borrowing.

What’s more, a sizable down payment can help you qualify for a lower interest rate and possibly eliminate the need for private mortgage insurance, both of which can save you money each month.

Improve Your Credit

Another way to qualify for a lower rate and, consequently, a lower monthly payment, is by improving your credit score.

Conventional loan programs require a minimum score of 620, and some government-backed loans go even lower. However, a score of 740 or above will give you a good chance of seeing the best interest rates.

Shop Around

Each lender has its own approach to evaluating mortgage applications, so it’s likely that you’ll get different offers from different lenders. It’s generally recommended to seek preapproval with three or more lenders to ensure you get the best possible terms.

Buy Down Your Rate

If you have enough cash on hand, you may be able to buy down your interest rate by buying discount points, which are a form of prepaid interest.

Each point typically costs 1% of your loan amount and reduces your interest rate by 0.25%. That’s not a lot, but it could make enough of a difference to meet a lender’s requirement. In a buyer’s market, you may even be able to get the seller to pay the cost of buying down the rate.

Apply for an Adjustable-Rate Mortgage

Adjustable-rate mortgage loans (ARMs) offer a fixed interest rate for a set period, say five to 10 years. After that, the rate becomes variable, changing every six or 12 months based on market conditions.

To make ARMs appealing to homebuyers, lenders offer lower upfront interest rates compared to fixed-rate mortgage loans. If you need a lower payment and expect to either move or refinance your loan before the initial fixed-rate period expires, an ARM could be worth it.

However, if your plans don’t pan out, you may be stuck with a fluctuating mortgage payment, which could increase beyond your ability to pay.

Other Costs of Homeownership

While your mortgage payment will likely be your greatest cost of homeownership, there are other expenses you’ll want to account for as you prepare to buy a home.

Property Taxes

Regardless of where you live, you’ll likely need to pay property taxes to your county or other local taxing authority. Your annual tax bill is based on the assessed value of your home and your area’s tax rate.

This expense is usually broken into monthly increments and included in your mortgage payment. The funds are set aside in an escrow account, which your lender will use to pay the bill when it’s due.

Homeowners Insurance

Lenders typically require you to maintain a minimum amount of homeowners insurance to protect the structure and your belongings and also provide liability protection.

Your homeowners insurance premium, which is also typically included in your mortgage payment and managed in your escrow account, is based on several factors. However, you can potentially save money by shopping around, increasing deductibles, minimizing unnecessary coverage and qualifying for discounts.

Maintenance and Repairs

A home is made up of a variety of systems and parts, each of which may require maintenance and repairs over the course of your homeownership.

Even if there were no issues when you bought the home, roof damage, leaky pipes, mold, pest infestation or other problems can crop up with no warning and cost you hundreds or even thousands of dollars.

Depending on your financial situation, experts recommend setting aside 1% to 4% of your home’s value each year just for maintenance. You’ll also want to build a robust emergency fund for potential repair costs.

Other Expenses

There may be other costs you’ll incur that aren’t unique to homeownership, such as HOA fees, utilities, yard maintenance and cleaning. While some of these expenses may be negotiable—or even avoidable—it’s still important to keep them in mind as you set your housing budget.

Your Credit Is Key When Buying a House

There are a lot of moving parts in the mortgage process, and lenders will review a lot of variables to determine whether you qualify for a mortgage and how much you can afford. Your credit score is one of the most important of these variables, so it’s crucial that you take time to improve it before you apply for a mortgage loan.

Start by getting access to your Experian credit report and FICO Score for free. With these resources, you can get a sense of where you stand and which areas need some work. Then, you can start taking the necessary steps to do so.

This may include getting caught up on past-due payments, paying down credit card debt, disputing inaccurate credit report information and more. Use your credit report as a guide to decide how to build your credit score.