How much of your monthly income should you spend on a mortgage?

Getting a mortgage is the most common way people purchase homes today. After all, most of us don’t have hundreds of thousands of dollars at our disposal. Instead, mortgages allow us to buy a home we love and repay the loan over time. But how much of a mortgage do you need? And what sort of payments can you realistically afford? The answers to these questions will depend on your income.

Ideally, the smaller percentage of your income you spend on a mortgage, the better. For most people, 28% is a reasonable figure. So for example, if your monthly income is $2,000, it’s probably wise to keep your mortgage payment around $560 per month. If you have another person who will be contributing to the mortgage, you can include their income as well. For instance, if you and your spouse earn a combined $3,000 per month, it would probably be best to have a mortgage with payments no more than $840 per month.

If you have variable income, meaning your income can vary month to month, you may need to look at your tax returns for the previous year and figure out what your average monthly income was. You’ll also need to take the following into consideration:

Gross vs Net – Pay attention to the difference between your gross and net pay as well as un-taxed income. Gross pay is what you earn before taxes are taken out, while net pay is what you actually take home. Remember, if you’re self-employed (or a 1099 employee) you may not have had taxes automatically taken out. Same if you had lottery winnings or another financial windfall. You’ll need to account for these things when doing your calculations, and we highly recommend consulting a tax professional or financial adviser when doing so.

Maintaining a Financial Safety Net – For those with variable incomes, it’s wise to set money aside in savings during good months to help you get through slower months. To do this, you may want to be more conservative and aim for a mortgage payment around 25% of your monthly income. If your income is an average of $2,000/month, that would give you a mortgage payment of around $500/month.

Other Considerations for Any Mortgage Borrower

What’s the true monthly cost? Consider the cost of any extra fees that might come with your mortgage. This could include private mortgage insurance premiums, FHA insurance premiums, property taxes, homeowners insurance, etc. If you fail to include these costs in your considerations, you may wind up with a mortgage payment that’s just above your means.

Don’t be tempted to max out your budget. Just because you’ve been preapproved for a $200,000 mortgage doesn’t mean you should be looking at $200,000 houses. Instead of using your preapproval amount as a guide to your budget, stick with the 28% of your monthly income rule. This will help you avoid living beyond your financial means.

Aim for less than 28% if possible. Remember, 28% of your monthly income is generally considered the maximum you should spend on a mortgage payment. If you can keep it below 28%, you’ll be in an even better financial position. If your income is $3,000 a month, your mortgage would be $840 if you stuck with the 28% rule. However, if you shoot for 25% instead, your payments would be closer to $750, and you would save around $90 per month, or $1,080 per year.

Are there any other expenses you’re forgetting? Are you going to need any repairs, remodeling, new appliances, new furniture, etc. for your new home? If so, then you’ll need to think about the cost of these items or services and include them in your home buying budget.

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