How Much Should You Spend on a Mortgage?

Understanding the All-Important Debt-to-Income Ratio

Young couple holding the keys to a new home
•••

PeopleImages / Getty Images

If you're looking to buy a home, knowing how much you should spend on a mortgage is a bit of a balancing act. Most people need to borrow some amount of money in order to buy a house—and a mortgage can be part of a good investing strategy, too. But you also don't want to borrow so much that your overall financial health is compromised by the debt. 

Luckily, there are a few different rules of thumb that you can use to answer the question, "how much should I spend on a mortgage?" We'll go over them in detail and help you decide which one might be best for your situation. 

Key Takeaways

  • Your debt-to-income (DTI) ratio is a measure of your total monthly debt payments divided by your total monthly income. 
  • Mortgage lenders use your DTI ratio when qualifying you for a mortgage, but you can also use it to help guide you on how much to spend on a mortgage.
  • Keeping your mortgage payment under 25% of your income is best, but some lenders may allow you to go as high as a 50% DTI ratio. 


How Much Can You Spend on a Mortgage?

Rather than looking at the total amount of money you can borrow for a house, it's better to look at how affordable your monthly payment might be. That's because this is what you'll be paying each month, so you want to make sure it fits into your budget. 

One of the best ways to measure that is the "debt-to-income" or DTI ratio. It's broadly calculated by dividing your debt payments by your income. More specifically, it can be measured in two ways:

  • Front-end DTI ratio: This measures your monthly mortgage payment as a percentage of your total gross monthly income. For example, if your salary is $54,000 per year ($4,500 per month) and your mortgage payment is $1,000, then your front-end DTI ratio is 22% ($1,000 / $4,500). 
  • Back-end DTI ratio: This measures your total monthly debt payments, including your mortgage, as a percentage of your total gross monthly income. If you also pay $250 per month for student loans and $200 per month for your credit cards, for example, your back-end DTI ratio would be 33% ([$1,000 + $250 + $200] / $4,500). 

Lenders use these ratios to figure out the maximum monthly mortgage payment you might qualify for. For example, Freddie Mac and Fannie Mae guidelines state that for a conventional mortgage, your back-end DTI ratio shouldn't exceed 36%. In other words, your debt payments combined shouldn't be more than 36% of your before-tax income each month.

Lenders look at other factors when deciding whether to approve you for a mortgage too, such as your credit score and how stable your job is. 

Rules of Thumb for How Much To Spend on a Mortgage

There are many ways to use your DTI ratio to figure out how much to spend on a mortgage payment. For example, there are maximum limits in place, but it's often a better choice to err on the conservative side so that you don't wind up house poor—meaning your mortgage payments are so big, you struggle to meet other expenses.

Only you and your financial advisor can determine what the best rule of thumb is for you. Here are the ones that people commonly use:

The 28/36 Rule

The 28/36 rule states that your front-end DTI ratio shouldn't be more than 28%, and your back-end DTI ratio shouldn't exceed 36%. In other words, your mortgage payment shouldn't be more than 28% of your before-tax income, and your mortgage with all of your other debt payments combined shouldn't be more than 36% of your before-tax income.

Most lenders use this rule of thumb to set maximum loan limits when you apply for a conventional mortgage, and that's why the rule is particularly common. But remember—just because this is the maximum of what a lender might give you, it doesn't mean it's the best fit for you. 

If you have a lot of unknowns in your life—such as fluctuating income, potential big expenses on the horizon, or question marks around student loan forgiveness—it might be better to opt for a more conservative rule of thumb. That way, you're not signing yourself up for a high mortgage payment that might be difficult to make in the future, even if you can now.  

25% Post-Tax Model

A more conservative rule of thumb is to limit your monthly mortgage payment to 25% of your after-tax income (i.e., what you see in your bank account).

For example, if your salary is $54,000, you might actually only see around $2,900 per month as take-home pay. If you limited your monthly mortgage payment to 25% of your paycheck, that translates into a mortgage of $729 per month. That's a lot less than the maximum $1,000 mortgage payment you'd be limited to with the 28/36 rule. 

Experts often favor this rule of thumb because it sets you up for a more sustainable mortgage payment. You'll have more flexibility to deal with emergencies, and save for retirement and homeownership expenses, etc. 

50% DTI Loans

In some rare cases, you may be able to get a conventional mortgage with a back-end DTI as high as 50%. Fannie Mae, for example, allows for this for certain types of loans that are underwritten by special software.

However, just because you can go as high as 50% DTI, that may not be wise. With an income of $54,000 per year, for example, that's a mortgage payment of up to $2,250 per month when you might actually only be bringing home just $2,900 per month after taxes. That's a dangerous place to be because you won't have the cash flow to deal with any emergencies or extra savings. 

How To Use DTI Ratios To See How Much House You Can Afford

Targeting a good DTI ratio for you can help you plan for how big of a mortgage to take out, and ultimately, what kind of house to shop for. Once you know the monthly payment you can afford, you can use a mortgage calculator to see what mortgage amount and down payment can get you to that monthly payment amount.

For example, if you're using the 25% post-tax rule and you bring home $5,000 per month, that means sticking with a mortgage payment of up to $1,250. Using the slider on the mortgage calculator, you can see that this means you can afford to buy a house worth $233,000 if you make a 20% down payment. 

Frequently Asked Questions (FAQs)

What is the highest DTI for a conventional loan?

The highest DTI you can get with a conventional loan is 50%. Even so, most lenders will limit you to a DTI of 36%. 

How much debt should I pay off before buying a house?

It's best to pay off as much debt as possible, but you also need to balance the need for a down payment. At a minimum, you'll need to pay off enough debt to afford your mortgage while still staying under the 36% back-end DTI ratio if you're looking for a conventional mortgage

What is a good front-end ratio?

While recommended front-end ratios vary based on rules of thumb, a "good" front-end ratio will depend on your situation. For you, that may mean you’ll be able to pay for and live in a home you like while still allowing you to reach your other financial goals, such as saving for retirement and emergencies, paying down debt, and enjoying hobbies.