There are a number of different factors to consider Part of the Series Using a Mortgage Calculator
If youre looking to buy a home, its important to understand how much you can afford to pay. A general guideline for an affordable mortgage is one equal to roughly 200% to 250% of your gross annual income. However, the specific amount you can afford to borrow depends on several factors, not just what a mortgage lender is willing to lend you. Youll need to evaluate your finances, preferences, and priorities. Heres everything you need to consider to determine how much you can afford.
If someone wants to buy a house, one of the most important financial decisions they can make is what a good monthly mortgage payment is. Since housing costs are usually the biggest monthly expense for most people, it’s important to find a mortgage that fits your budget. This complete guide looks at all the important things that affect how much your monthly mortgage payment should be.
How Lenders Calculate What You Can Afford
Mortgage lenders want to make sure you can handle the monthly payments, so they analyze several aspects of your finances:
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Gross monthly income – Your pre-tax income from all sources. If your income is higher, you may be able to get a bigger loan with bigger payments.
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Debt-to-income ratio – Also called DTI, this compares your monthly debt payments to gross monthly income. Most lenders want your total DTI to stay under 43%.
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Credit score – Higher scores indicate lower lending risk. This helps determine the mortgage interest rate offered.
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Down payment amount – Typically lenders require at least 20% down to avoid private mortgage insurance. More down means less required financing.
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Loan term: Loan terms that last longer, like 30 years, have lower monthly payments but cost more in interest over time.
Based on these factors, lenders use formulas to estimate the maximum monthly mortgage payment you can afford. But you’ll also need to examine your personal finances and preferences to find the optimal amount.
General Recommended Guidelines
While lenders ultimately determine approval, there are some general guidelines on an affordable monthly mortgage payment:
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28% of gross income – A popular rule is to keep your mortgage payment under 28% of gross monthly income.
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25% of net income – Some experts recommend budgeting based on your take-home pay after taxes/deductions. This would be 25% of net income.
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28/36 rule – Your mortgage payment should be under 28% of gross income, while total monthly debt under 36%.
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Housing expenses of 30-40% – On the high end, some lenders will approve mortgages taking up to 40% of gross income.
These guidelines help narrow down an affordable range, but you’ll still need to assess your complete financial picture.
Factors to Consider for Your Situation
While helpful for initial estimates, generic rules can’t replace evaluating your unique circumstances:
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Job stability – If your income fluctuates or employment is uncertain, budget conservatively.
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Current debts – The higher your existing payments, the less you can allocate towards a mortgage payment.
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Future expenses – Account for predictable big-ticket items like college savings or retirement.
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Lifestyle – Don’t stretch your budget so thin you can’t afford discretionary spending.
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Risk tolerance – Consider how comfortable you are dedicating a large portion of your income to housing.
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Home costs beyond mortgage – Tally property taxes, insurance, maintenance, utilities, furnishings, etc.
Taking the time to analyze these personal factors will lead to a monthly payment you can truly live with.
Tips for Lowering Your Monthly Payment
If the payment amount you’re qualified for stretches your budget too thin, here are some options to reduce it:
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Increase your down payment – More money upfront means less borrowed and lower monthly payments.
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Choose a longer loan term – 30-year mortgages have lower payments than 15-year loans, for example.
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Buy a less expensive property – Compromising on size, location or amenities brings down costs.
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Improve your credit – Boosting your score can help you qualify for a lower interest rate.
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Reduce other debts – Pay down credit cards and loans to lower your DTI.
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Pick a fixed-rate mortgage – Avoid unpredictable payments with adjustable-rate loans.
What Happens if You Can’t Afford Payments?
If your financial situation changes and monthly payments become unaffordable, you do have options:
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Refinance your mortgage – You may qualify for a lower rate to reduce payments.
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Rent out rooms – Earn rental income to help cover the mortgage.
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Seek loan forbearance – Temporarily pause or reduce payments for a set time.
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Sell the property – If all else fails, unloading the house stops the mortgage burden.
The key is addressing affordability issues sooner than later. Letting payments lapse into default can lead to foreclosure and severe credit damage.
Signs You Can’t Afford the Mortgage
Watch for these potential indicators the monthly payment is becoming too much:
- Relying on credit cards or loans to pay other bills
- No money leftover after paying monthly debts
- Skipping important expenses like medical care
- Not saving anything for retirement or emergencies
- Anxiety/stress over making upcoming mortgage payments
If you recognize these patterns, it may be time to reevaluate your housing costs.
The Bottom Line
Determining an affordable mortgage payment that fits your financial situation is crucial. While lenders use formulas to set maximums, you’ll need to closely analyze your income, debts, lifestyle and risk tolerance. There are also many options to reduce monthly costs if needed. Being prudent on the front end and monitoring ongoing affordability helps ensure your long-term financial health.
How Much of a Mortgage Can I Afford?
Most prospective homeowners can generally afford to finance a property whose mortgage is between two and three times their annual gross income. Under this formula, a person earning $100,000 per year can only afford a mortgage of $200,000 to $250,000. However, this calculation is only a general guideline.
Ultimately, when deciding on a property, you need to consider several additional factors. First, its a good idea to understand what your lender thinks you can afford and how it arrives at that estimate.
Second, you need to have some personal introspection and figure out what type of home you are willing to live in if you plan on living in the house for a long time and what other types of consumption you are ready to forgo—or not—to live in your home.
While real estate has traditionally been considered a safe long-term investment, recessions and other disasters (like the 2020 economic crisis) can test that theory—and make would-be homeowners think twice.
How Do Lenders Determine Mortgage Loan Amounts?
While each mortgage lender maintains its own criteria for affordability, your ability to purchase a home (and the size and terms of the loan you will be offered) always depends mainly on the following factors.
Many factors go into the mortgage lender’s decision on homebuyer affordability, but they boil down to income, debt, assets, and liabilities. A lender wants to know how much income an applicant makes, how many demands there are on that income, and the potential for both in the future—in short, anything that could jeopardize its ability to get paid back.
Your income, down payment, and monthly expenses are generally base qualifiers for financing, while your credit history and score determine the rate of interest on the financing itself.
How To Calculate Your Mortgage Payment
FAQ
What is a normal mortgage payment per month?
In just a few short years, the average monthly mortgage payment has gone from about $1,100 in 2020 to about $2,207 in 2024—a huge jump. Jan 28, 2025.
Can I afford a 300K house on a $70K salary?
Can I afford a $300K house on a $70K salary? If you have minimal debts then a $70,000 salary might be enough to afford a $300,000 house. The size of your down payment and your mortgage interest rate will be important variables. Try to keep your monthly house payments below a third of your monthly gross income.
Is $2000 a month too much for a mortgage?
The 25% post-tax model suggests keeping your total monthly debt at or below 25% of your post-tax income. To calculate your affordable mortgage payment, multiply your post-tax monthly income by 0. 25. For example, if you earn $8,000 after taxes, you may be able to afford up to $2,000 for your monthly mortgage payment.
What salary do you need for a $500000 mortgage?
A $500,000 mortgage payment might be as low as $3,045 if you put a lot of money down, pay low property taxes, and get cheap insurance. To adhere to the 28/36 rule, your gross monthly income would need to be $10,876, which is a little more than $130,000 annually.