How much should I spend on my mortgage payment?
First off, it is important to point out that there is a difference between how much you are allowed to spend on your monthly mortgage payment and how much you should spend on your payment. We want to emphasize that it is most important that you are comfortable with your mortgage payment even if it is less than the payment a lender says that you can afford.
Second, although there is no set figure, lender guidelines typically permit you to spend 32% to 39% of your monthly gross income on total monthly housing expense, which includes your mortgage payment, property tax, homeowners insurance and other potentially applicable housing costs such as mortgage insurance, homeowners association (HOA) dues or co-op fees.
All of these are extra housing expenses are related to having a mortgage and owning a home that you should consider in addition to your monthly mortgage payment. So instead of asking how much should I spend on my mortgage, you really should be asking how much should I spend on total monthly housing expense?
Use our MORTGAGE QUALIFICATION CALCULATOR to determine the loan you can afford based on your income
The example below shows how your total monthly housing expense, including your mortgage payment, changes depending on the percentage of your gross income that you spend. Please note this example is based on your gross income, or how much you make before deductions for income taxes, social security and medicare. Lenders use your gross income to determine what size mortgage you can afford.
Monthly Gross Income: $5,000
Total Housing Expense Based on Spending 32% of Gross Income on Mortgage: $1,600
Total Housing Payment Based on Spending 39% of Gross Income on Mortgage: $1,950
The more you spend on your monthly mortgage payment and total housing expense, the higher the mortgage amount you can afford. Additionally, the lower your non-mortgage housing costs, the more you can spend on your mortgage payment while the higher these costs, the less you can spend on your mortgage.
For example, if you buy a single family home with no HOA or co-op fees in a county with a low property tax rate, you can afford a higher monthly mortgage payment and loan amount. On the other hand, if you pay high property taxes and HOA dues, your mortgage payment should be lower.
Additionally, your lender and loan program may impact how much you spend on your mortgage payment. Mortgage programs typically apply a maximum debt-to-income ratio to determine how much of your monthly gross income you are permitted to spend on your monthly mortgage payment plus other debt expenses such as credit card and auto, student and personal loan payments.
Please note that your debt-to-income ratio is based on your monthly debt payments and not your outstanding loan balance. So if you pay $250 on a credit card with a $3,500 account balance, the lender includes $250 in your debt-to-income ratio and not the entire $3,500 loan balance.
The maximum debt-to-income ratio typically ranges from 43% to 50%, depending on the lender and loan program. For example, the FHA mortgage program permits a higher applicant debt-to-income ratio than the VA and USDA home loan programs.
Many conventional mortgage programs allow lenders to use higher debt-to-income ratios but some lenders apply their own more conservative guidelines and use a lower ratio. So your monthly mortgage payment varies depending on the lender and mortgage program you choose.
Review What Size Mortgage Can I Afford?
Given how a debt-to-income ratio works, how much you should spend on your monthly payment also depends on your non-housing related debts. The more you spend on monthly payments for other debts such as for credit cards and car and student loans, the less you can afford to spend on your monthly mortgage payment, and vice versa.
The example below demonstrates how non-housing related monthly debt payments affect how much you can afford to spend on your monthly mortgage payment and housing expenses. The example uses a 45% debt to income ratio and compares a scenario where the borrower has $500 in non-housing monthly debt payments to a scenario where the borrower has no other monthly debt payments.
Example of Borrower with $500 in Monthly Debt Expense
Monthly Gross Income: $5,000
Debt-to-Income Ratio: 45%
Amount Borrower Can Spend on Total Monthly Debt Payments Including Mortgage: $2,250
Non-Housing Monthly Debt Payments: $500
Amount Borrower Can Spend on Mortgage and Total Housing Expenses: $1,750
Example of Borrower with No Monthly Debt Expense
Monthly Gross Income: $5,000
Debt-to-Income Ratio: 45%
Amount Borrower Can Spend on Total Monthly Debt Payments Including Mortgage: $2,250
Non-Housing Monthly Debt Payments: $0
Amount Borrower Can Spend on Mortgage and Total Housing Expenses: $2,250
This example demonstrates that the less monthly debt you have, the more you can spend on your mortgage payment and the higher the mortgage amount you can afford.
In addition to your debt-to-income ratio, other considerations including your down payment and financial reserves also impact how much you should spend on your mortgage. Some lenders apply higher debt-to-income ratios for applicants who make a larger down payment or who have more savings in reserve. These factors can also help you feel more financially secure and become more comfortable with your monthly payment.
In short, the best way to determine how much you should spend on your mortgage payment is to make sure your payment fits within your financial means and monthly budget.
Sources
“How do mortgage lenders calculate monthly payments?” CFPB. Consumer Financial Protection Bureau, March 3 2017. Web.
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