Mortgage experts historically have recommended your mortgage payments (including property taxes and insurance) cost less than 30% of your income. This leaves enough buffer to budget for emergencies and other important things. The reality today is that budgeting 30% of income to a mortgage is more challenging, with monthly mortgage payments on a typical U.S. home nearly doubling since January 2020 (up 96.4% to $2,188). Zillow research from July 2024 revealed that homeowners who put down 5% on a home spent 43% of their income on a mortgage, while homebuyers who put down 20% spent 35% of their income on a mortgage.
Deciding how much your income should go to a mortgage is about discovering your affordability and establishing a comfortable mortgage budget to reach your homeownership goals. We’ll guide you through some common ways to calculate a mortgage as a percentage of your income, and provide you with some helpful tips on how lenders assess your mortgage affordability.
What is included in a mortgage payment?
Mortgage payments are divided into what lenders call PITI: Principal, interest, taxes, and insurance. You can expect to pay the principal and interest monthly, while your taxes and insurance may be paid separately, either annually or biannually.
Some lenders will require you to pay taxes and insurance each month, along with your principal and interest, when you make a down payment of less than 20%. Regardless, most homebuyers opt to include them in their monthly mortgage payment to make the bills more manageable to pay. When taxes and insurance are paid on your behalf, they’re considered escrow payments.
Principal
The principal amount is the total loan amount borrowed. This is the home sale price minus your down payment. In the first few years, your principal payments will be smaller than your interest payments.
Mortgage interest
Mortgage interest is the amount you’ll pay on top of your principal balance based on your interest rate, loan type, and term. In the first few years, most of your mortgage payment will go towards interest.
Property taxes
Your county tax assessor sets property taxes, which means they’ll vary depending on your property’s location. Property taxes are paid directly to your county’s tax assessor or collected monthly as part of your mortgage escrow payment. If the latter is the case, your lender will pay the tax assessor on your behalf using the money collected and stored in your escrow account.
Homeowners insurance
Your homeowner's insurance is based on the value of your property and the likelihood of that property incurring damages. The insurance is paid directly to your home insurance company every month. And the premiums may change every six months. Home insurance, like property taxes, may also be collected as part of your mortgage escrow payment, and then paid by your lender on your behalf.
Mortgage insurance
Mortgage insurance is required for borrowers making a down payment of less than 20% with a conventional loan or borrowing with an FHA loan regardless of the down payment amount. Mortgage insurance is included in your escrow payment and paid monthly. Conventional loans allow you to remove mortgage insurance after you hold 20% to 22% equity in your home.
How much of your monthly income should go to a mortgage?
To comfortably afford mortgage payments — principal and interest, plus property taxes and insurance — most experts generally say you should spend no more than 30% of the typical income in an area. The truth is, new homeowners spent between 35% and 43% of their monthly income on a mortgage in July 2024. Finding a comfortable mortgage versus income ratio requires assessing your finances. When calculating how much of your income you should spend on a mortgage, remember the other monthly debts you’ll pay, in addition to a mortgage payment.
Your lender will consider both your monthly mortgage costs and your minimum monthly debts when measuring your ability to manage mortgage payments. The fewer debts you have or the higher your income, the more likely you are to qualify for better loan terms, like lower interest rates.
Common ways to calculate how much your mortgage should be
While the general rule of thumb is to spend no more than 30% of your income on a mortgage, here are a few calculations you can use as a guide to help you budget for a mortgage payment.
Debt-to-income (DTI) ratio
Debt-to-income ratio is a formula used by lenders to show how much of your gross monthly income (your income before taxes are removed) will go toward paying mortgage costs, in addition to your other recurring monthly debts. Your debts, including your mortgage costs, should be less than 50% of your income.
Mortgage costs: This includes your principal, interest, homeowner’s insurance, property taxes, mortgage insurance, and homeowner’s association (HOA) dues you plan to pay each month.
Recurring debts: This is the total amount of debt payments you must make each month, including minimum credit card payments, car loan payments, student loan payments, personal loan payments, child support payments, and alimony payments.
DTI calculation example
To calculate DTI, add all your monthly debts, and then divide the amount by your gross monthly income. Take that number and multiply it by 100 to get your percentage of debt-to-income. If your gross monthly income is $10,000 and you estimate you’ll spend $3,600 on a mortgage, while also paying a monthly car payment of $500 and credit card minimums totaling $50, your debt-to-income percentage would be 41.5%.
($3,600 + $500 + $50) / $10,000 = 0.415 x 100 = 41.5%
The 28%/36% rule
The 28%/36% rule looks at your income in relation to mortgage costs and your other monthly debts. With the 28%/36% rule, your mortgage costs should be less than 28% of your monthly income before taxes are removed, and your monthly debts should be less than 36% of your income.
28%/36% calculation example
To calculate how much you can afford using the 28%/36% rule, multiply your gross monthly income by 0.28 and then multiply your gross monthly income by 0.36. The first number represents 28% of your income that should be spent on mortgage costs, and the second number represents 36% of your income that should be used to pay other monthly debts.
Let’s say your monthly income before taxes is $10,000:
$10,000 x 0.28 = $2,800
$10,000 x 0.36 = $3,600
This means your monthly mortgage costs should be less than $2,800, and your monthly debts less than $3,600.
The 35%/45% rule
The 35%/45% rule can be used to set a pre-tax and post-tax income budget for a mortgage. With the 35%/45% rule, your mortgage payment and recurring debts should not exceed 35% of your gross income (pre-tax) or 45% of your net income (post-tax).
35%/45% calculation example
Let’s say your monthly gross income before taxes is $10,000 and your net income after taxes is $9,000:
$10,000 x 0.35 = $3,500
$9,000 x 0.45 = $3,050
This means you can afford a mortgage between $3,050 and $3,500.
The 25% post-tax rule
The 25% post-tax rule implies your mortgage payment should be at least 25% less than your income after taxes are removed.
25% post-tax calculation example
Let’s say your monthly income is $7,500 after taxes:
$7,500 x 0.25 = $1,875
This means your mortgage payment should be less than $1,875.
How mortgage lenders determine what you can afford
Gross income
Gross income refers to your total earnings before taxes and other deductions. Your total income may include spousal support, pension, rental income, and any other sources of income you receive. When you co-borrow with a friend, family member, or significant other, the lender will assess your mortgage qualifications based on the combined gross monthly income of you and your co-borrower.
Debt-to-income ratio (DTI)
DTI measures your monthly income versus your monthly debt payments — including your estimated monthly mortgage costs. The ideal DTI ratio is 36%, but some lenders will allow as high as 50%, depending on your other financial factors, such as credit score, income, and down payment amount.
Let us do the math for you. Use our DTI Calculator to estimate your debt-to-income ratio.
Credit score
Your credit score and history help lenders predict your likelihood of repaying your loan. Your credit score can affect the type of mortgage and interest rates you qualify for. Conventional loan lenders typically require a 620 minimum credit score, but FHA lenders may require as low as 500.
Employment history
A steady source of income is also something lenders look for to determine your ability to make timely mortgage payments. They’ll verify you have two years of work history and look at paystubs from the previous two months to verify your income.
How to get lower monthly mortgage payments
Make a bigger down payment
The bigger your down payment, the less money you’ll need to borrow and pay interest on over the life of the loan. Borrowing less also reduces your monthly principal payments and reduces your PMI rate. While a 20% down payment eliminates the need for mortgage insurance, putting down even 10% versus 5% will likely lower your PMI rate, and your PMI payment will drop off the mortgage faster.
Choose a longer mortgage term
Choosing a 30-year mortgage instead of a 15-year will break your mortgage into smaller monthly payments. The longer loan term makes your monthly payments more manageable and helps you achieve a better debt-to-income ratio. Many lenders also allow you to pay off your loan early without prepayment penalties, which means you can still pay more toward your principal each month and pay your loan off faster.
Improve your credit score
A higher credit score can increase your chances of qualifying for better interest rates, which will reduce the costs of your mortgage and monthly payments. To improve your credit score, pay recurring debts consistently on time and lower your overall debt.
Consider co-buying
With rising mortgage costs, co-buying with a friend or relative is becoming popular. Co-buying with one or more people may help increase your mortgage affordability and help you qualify for better loan terms. According to a 2023 Zillow survey, 50% of homebuyers co-bought with a partner or spouse, 12% co-bought with a relative, and 14% co-bought with a friend. Nearly half (46%) of these co-buyers cited the ease of mortgage approval when co-buying (generally via co-borrowing) as a reason.
Seek out less competitive housing markets
While moving long distance isn’t ideal for everyone, it’s not uncommon for homebuyers to relocate to find a more affordable home. A recent Zillow analysis of United Van Lines' move data showed that movers relocated to a metro where a home would save them, on average, about $7,500 compared to where they came from.
How to lower your existing monthly mortgage payments
Consider refinancing
Mortgage refinancing involves paying off your existing mortgage with a new one. Refinancing often enables homeowners to obtain better interest rates, change their loan terms, and even take advantage of their home equity.
Take on a roommate
Renting out a room is a common way to reduce monthly mortgage payments. With rising homeownership costs, many young homeowners are taking advantage of the opportunity to rent out a portion of their homes for rental income. Also known as house hacking, this trend is most prevalent among Gen Z and Millennials, who place a higher importance on the potential to earn rental income to offset their mortgage payments or generate a “boarder income”.
As you’re determining how much of your income should go to a mortgage, it's a good idea to get pre-qualified to get an estimate on how much you may be able to borrow for a home loan. This will give you a starting point in thinking about your home buying budget. Check if you pre-qualify for a mortgage with us at Zillow Home Loans.*
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