How to Calculate Your Maximum Mortgage Budget

Buying a house is a major life decision that requires a significant amount of foresight and budgeting. It’s easy to think of a mortgage like you might rent — a monthly payment for housing costs. A mortgage, however, has several costs lumped into one payment: principal, interest, taxes, and insurance. Before taking the plunge and buying your dream home, it’s a good idea to know exactly what you can afford with your income. Here are some expert tips on how to calculate your maximum mortgage budget.

The 28/36 Rule

Financial advisors often direct future homeowners towards the conservative “28/36 rule,” which dictates that no more than 28% of your gross monthly income should go towards your mortgage, and no more than 36% should go towards your debts, including housing. For example, if your monthly income is $5,000, your mortgage should be no more than $1,400 (28% of $5,000), and your debts should add up to no more than $1,800 (36% of $5,000). That means that any debts that aren’t housing should cost no more than $400 and the remaining $3,200 should be distributed among essentials (food, transportation, clothing, etc…) and savings. 

The 35/45 Rule

In response to the modern housing market, financial advisors and planners have encouraged potential buyers to look instead at the 35/45 rule. With this rule, a mortgage spending range is determined by your monthly gross and net income. Your monthly debt — including your mortgage — shouldn’t be more than 35% of your gross monthly income or more than 45% of your net income. For example, let’s say your pre-tax income is $6,000 and $5,000 after taxes. Using 35% and 45% of those numbers, that means you can afford a monthly mortgage between $2,100 and $2,250. While this is a risky investment model, it may be less of a concern for buyers with good credit scores. 

Splitting the Difference

The housing and financial markets exist at the whims of several global factors, and many people end up spending more than 28% of their income on mortgage payments. If you have trouble following either of these rules, a more neutral option is keeping your maximum budget to 30% of your annual income. This is the safest option to ensure you can save for the future and pay off your debts. To compare it to the previous “rules,” if your gross annual income is $60,000 ($5,000 per month), you should plan to spend no more than $18,000 on your mortgage annually.

Despite being labeled as “rules,” these suggestions are all simply guidelines for the best way to budget. No laws dictate how much or little you should budget for mortgage payments, and the amount will likely fluctuate depending on your work, the economy, and other factors. As long as you stay realistic about your finances, a home — and a budget to pay for it — can be in your future.

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