What Percentage of a Gross Income Should a Mortgage Payment Be?

When lenders are considering applications for mortgages, a major factor they consider is your ability to repay the loan based on your current financial circumstances. To measure this, lenders examine what percentage of your income the mortgage payment will account for.

Front-End Ratio

The front-end ratio is used by lenders to compare the amount you will spend on the mortgage and closely related expenses as a percentage of your gross income. Most lenders do not want this percentage to exceed 28 percent.

Costs to Include

In addition to your mortgage payment, most lenders will the amount you have to pay for real estate taxes, homeowner's insurance and private mortgage insurance when determining your front-end ratio.

Other Debt Payments

Lenders also consider how much of your income is put toward other debt payments like credit cards or student loans. Most lenders do not want the total of your mortgage and other debt obligations to exceed 36 percent of your income.

Considerations

The figures used by lenders are maximums that they will allow. However, you should seriously consider your own financial circumstances to determine how much you can really afford to pay each month.

Exceptions

Some lenders will consider allowing your monthly payment to exceed these percentages if you have a very good credit score or make a larger down payment. However, you may have to pay a higher interest rate on the mortgage to make up for the increased risk of default.

References

• Bankrate: How Much House Can You Buy?
• MSN Money: Don't Bite Off Too Much House