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Money experts use a lot of general guidance to help people make better financial decisions, and it's no different with mortgage loans. One common rule of thumb is that your monthly mortgage and related housing expenses should be no more than 28% of your gross monthly income.
However, how much you can actually afford to spend will depend on your budget and other expenses. Also, lenders typically have limitations based on your income and other debts. If you're trying to figure out how much house you can afford, here's what to keep in mind.
What Percentage of Your Income Can You Afford for Mortgage Payments?
For most homebuyers, home affordability comes down to a few primary factors: your income, your other debts and expenses, and the lender you're working with.
Lenders use something called the 28/36 rule to determine how much you can afford in monthly housing payments, which, in turn, determines the maximum loan amount you can qualify for. The name for this rule comes from two measures of how your debt compares to your income—your front-end and back-end debt-to-income ratio (DTI).
- Front-end DTI measures how much of your monthly gross (pre-tax) income goes toward your mortgage payment (both principal and interest), property taxes and mortgage insurance. Mortgage lenders want their borrowers to be able to keep this below 28%.
- Back-end DTI includes all of your debt payments in addition to the proposed mortgage payment. Lenders want to make sure these expenses don't exceed 36% of your monthly gross income. This means if 10% of your income goes toward other debts, you may be limited to 26% of your income for housing payments instead of 28%.
As an example, if you earn a $60,000 salary, that's $5,000 in gross income every month. Using the 28/36 rule, you can afford up to $1,400 per month in housing expenses and $400 per month in additional debt payments. If you have $600 in non-housing debt payments every month, the lender may limit you to $1,200 in housing payments.
It's important to keep in mind that there are lenders and loan types that allow you to exceed these limits. Federal Housing Administration (FHA) loans, for instance, allow borrowers to have up to a 31% front-end DTI and 43% back-end DTI. But if you're taking on more debt than is recommended, it could cause lenders to view you as more of a risk of default, and you may end up with a higher interest rate because of it.
Mortgage Affordability by Profession
To give you an idea of what you might be able to afford based on your profession, here's how these DTI limits compare with salaries of some of the most popular jobs, according to the Bureau of Labor Statistics:
|Maximum Mortgage Payments by Profession|
|Occupation||2018 Median Salary||Monthly Gross Income||Maximum Monthly Payment (28%)|
|Food preparation and serving workers||$21,250||$1,771||$496|
|Home health aides||$24,200||$2,017||$565|
|Waiters and waitresses||$21,780||$1,815||$508|
|General and operations managers||$100,930||$8,411||$2,355|
|Janitors and cleaners||$26,110||$2,176||$609|
|Laborers and freight, stock and material movers||$28,260||$2,355||$659|
|Market research analysts and marketing specialists||$63,120||$5,260||$1,473|
|First-line supervisors of food preparation and serving workers||$32,450||$2,704||$757|
|Landscaping and groundskeeping workers||$29,000||$2,417||$677|
|Heavy and tractor-trailer truck drivers||$43,680||$3,640||$1,019|
Source: U.S. Bureau of Labor Statistics. Jobs are listed in order of projected growth through 2028.
It's important to note that, depending on your income and where you live, buying a home may not be an option based on debt-to-income limits alone. By applying with a spouse or other trusted family member who also has income, you may be able to improve your chances of purchasing a home.
How Does Credit Affect Mortgage Affordability?
A crucial factor in calculating your monthly mortgage payment is the loan's interest rate. To help determine what your interest rate would be, lenders review your credit report and credit score in addition to other factors.
In general, borrowers with higher credit scores can secure lower interest rates because they're able to show that they've managed their debts well in the past. In the lender's eyes, this positive payment history lessens the risk that the borrower will default on their monthly mortgage payments.
On the flip side, a low credit score could result in a higher interest rate or even the outright denial of an application. The minimum credit score for a mortgage loan can vary based on the lender and the type of loan you're applying for.
How Does Your Down Payment Affect Mortgage Affordability?
Your down payment plays a big role in your mortgage's affordability. The size of your down payment affects the amount of the monthly payment you'll be making to cover the rest of the mortgage amount; a bigger down payment decreases your monthly payment and vice versa. So, if you're worried about your DTI affecting your mortgage eligibility, coming up with a larger down payment can help you qualify.
For example, if you're buying a $250,000 home with a 4% interest rate over 30 years, a $20,000 down payment would give you a monthly principal-and-interest payment of $1,098. But if you put down $40,000, your monthly payment would drop to $1,003—and you'd also save nearly $35,000 in interest over the life of your loan.
While a 20% down payment is a standard recommendation from mortgage experts, it's not a requirement. In fact, many lenders allow down payments as low as 3% or 5% of the loan amount.
If you don't have a lot of cash for a down payment and you're a first-time homebuyer, there are several programs and grants that can provide you with down payment assistance or even loans with no down payment requirement.
Consider more than just your monthly payment as you decide how much money to put down. For example, if you drain your savings for a down payment, you could experience some difficulties if you have a financial emergency in the near future.
On the other hand, if you put too little down and housing prices drop after your purchase, you could end up upside down on your mortgage loan, which can make it challenging to move or sell the home.
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 checking your credit score and credit report to see where you stand and which areas you need to address. Then 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.