The strictest rule that some lenders and borrowers follow is the 25% rule, which says your monthly housing payment should be 25% or less of your monthly net income (or what you take home after taxes and other deductions). In the scenario above, you would need your monthly mortgage payment to be $1,214 or less.
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.
First, this rule is based on calculating 30% of gross income (before taxes and expenses), not net income, which is what a person collects after taxes, retirement savings, investment fees, and the like. Second, factor escrow expenses and other fees into mortgage payments and rents.
Experts recommend only spending between 25%-35% of your after-tax income on rent and housing.
Ever heard of the 30% rule? It's the idea that you should budget a minimum of 30% of your gross monthly income (i.e., your before-tax income) for housing costs, and it's practically a personal finance gospel. Rent calculators often use the 30% rule as a default assumption to determine how much house you can afford.
The monthly income rule
"You want to make sure that your monthly mortgage is no more than 28% of your gross monthly income," says Reyes. So if you bring home $5,000 per month (before taxes), your monthly mortgage payment should be no more than $1,400.
“Most lenders follow the guideline that a borrower's housing payment (including principal, interest, taxes and insurance) should not be higher than 28 percent of their pre-tax monthly gross income,” says Winograd.
The Bottom Line. On a $70,000 salary using a 50% DTI, you could potentially afford a house worth between $200,000 to $250,000, depending on your specific financial situation.
It doesn't include taxes or investment fees.
The rule guides how much to withdraw from your portfolio each year and assumes that taxes or fees, if any, are an expense that you pay out of the money withdrawn. If you withdraw $40,000, and have $5,000 in taxes and fees at year-end, that's paid from the $40,000 withdrawn.
Bottom line. Like any conventional wisdom, the 28/36 rule is only a guideline, not a decree. It can help determine how much of a house you can afford, but everyone's circumstances are different and lenders consider a variety of factors.
On a $200,000, 30-year mortgage with a 6% fixed interest rate, your monthly payment would come out to $1,199 — not including taxes or insurance. But this can vary greatly depending on your insurance policy, loan type, down payment size, and other factors.
What do lenders generally require? Lenders usually require the PITI (principle, interest, taxes, and insurance), or your housing expenses, to be less than or equal to 25% to 28% of monthly gross income. Lenders call this the “front-end” ratio.
Those will become part of your budget. The 50-30-20 rule recommends putting 50% of your money toward needs, 30% toward wants, and 20% toward savings. The savings category also includes money you will need to realize your future goals.
On a $90,000 salary, you could potentially afford a house worth between $280,000 to $320,000, depending on your specific financial situation. This range assumes you have a good credit score and manageable existing debts.
The lender will also consider how much you make on a monthly basis to determine how much you can afford to borrow. In this case, their income calculation simply involves dividing your annual gross income — your income before taxes and any applicable tax deductions — by 12 to determine your monthly gross pay amount.
The Bottom Line. To comfortably afford a 400k mortgage, you'll likely need an annual income between $100,000 to $125,000, depending on your specific financial situation and the terms of your mortgage. Remember, just because you can qualify for a loan doesn't mean you should stretch your budget to the maximum.
You'll likely need an annual salary of at least $250,000 to finance a $1 million dollar home with a 30-year mortgage, assuming a 20% down payment and low escrow costs. The income required to purchase a million-dollar home varies based on your location, loan amount, mortgage rate and other affordability considerations.
To afford a $700,000 house, you typically need an annual income between $175,000 to $235,000, depending on your financial situation, down payment, credit score, and current market conditions. However, this is a general range, and your specific circumstances will determine the exact income required.
While the world of personal finance provides a percentage guideline for how much of your money should go toward housing, this rule is a little outdated in 2024. Rent prices are down from their peak in August of 2022, but they're still dramatically higher than before the pandemic.
They believe you should spend no more than 30% of your gross monthly income on your mortgage payment, have at least 30% of the value of your home saved up in liquid or semi-liquid accounts, and look for houses no more than 3x your annual household income.
Multiply your gross monthly pay by 30%
Take the amount you earn before taxes each month and multiply it by 0.30. This is the maximum amount you should spend on rent each month, according to the 30% rule.
"House poor" is a term used to describe a person who spends a large proportion of their total income on homeownership, including mortgage payments, property taxes, maintenance, and utilities.
An individual earning $60,000 a year may buy a home worth ranging from $180,000 to over $300,000. That's because your wage isn't the only factor that affects your house purchase budget. Your credit score, existing debts, mortgage rates, and a variety of other considerations must all be taken into account.
What Is the 28/36 Rule? The 28/36 rule refers to a common-sense approach used to calculate the amount of debt an individual or household should assume. A household should spend a maximum of 28% of its gross monthly income on total housing expenses according to this rule, and no more than 36% on total debt service.